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Some investors, when forecasting a localized (to the relative nation or source of currency) economic downturn or currency devaluation, choose to invest in foreign currency. I have seen portfolios that hold currencies from relatively stable economies to balance aggressive holdings. Is this ever a viable long-term strategy?

If I held 1 share of every company on the S&P 500 Index, I would gain total value by the end of the year (in this economy). If I held 1 valuation (dollar, peso, yen, etc.) of each currency, I would end the year with the same value as when I started (in this economy). Is holding large amounts of foreign currency ever a good strategy for long-term investors?

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    " If I held 1 dollar of every currency," Not sure what you mean by this.
    – D Stanley
    Commented Oct 25, 2019 at 16:03
  • Sorry, you're correct. Edited to make more sense, "1 valuation (dollar, peso, yen, etc.) of each currency".
    – Canbo
    Commented Oct 25, 2019 at 16:23

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You "gain" only when you sell something. Just by owning Google stock, you are not gaining any cash in hand (if we disregard dividends). Currency can be traded efficiently, as an investment in economy of another country relative to your own. Let's say you are in the US and think that Wakanda will do better in near future, relative to your country.

In practical terms it means that while price of bread in USD will stay the same or go down, the conversion rate of Wakanda currency (Wakandan Dollar, or WD) will go up. That means that today you can buy 1 WD at a price of $0.5USD, in a year you might be able to sell it at $1USD. If the price of goods (zero inflation) will stay the same in the US, you will be able to buy 2x as much stuff through this trading next year.

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Consider a carry-trade. Borrow at 0% in Europe and invest at 2% in the U.S.

Or sell the EUR/USD currency pair. The forex broker will take about 0.75% commission and pay about 1.25% interest. But that's 1.25% interest on the leveraged amount. The leveraging is like borrowing.

One example of hedging the position would be to buy gold. Or hedge with a second currency position that sells the USD/Other or that buys the Other/USD.

Or don't worry about hedging the position because of some long-term view.

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