Posted by Mike Smith :: October 17, 2007 @ 6:42 amRecent declines in the value of the Dollar have yielded new lows in its worth relative to the Euro. This trend may lead you to wonder what is causing these changes and how you can protect yourself against its declining value.
The value of the Dollar, relative to other currencies, is influenced by many factors. The most recent declines are likely due to the Federal Reserve’s larger than expected cut of the Fed Funds Rate. While this cut does make money “less expensive” it also signals that the Fed’s concern over inflation may be rising. Inflation is a general weakening in the value of the Dollar, which would lower its worth relative to other currencies.
In order to combat weakness in the Dollar, the general strategy is to shift funds into other forms of money. This can be done by exchanging Dollars to a foreign currency, investing in companies with operations in countries with an alternative currency, or purchasing gold, or a similar instrument of money, which is frequently traded for Dollars. Each of these strategies tries to accomplish the same thing: place your wealth in a medium that will increase in Dollar value as the Dollar continues to fall. If you look at the gold option, for example, you can see how as the value of the Dollar falls, it would take more and more Dollars to purchase the same amount of gold. In this way, the gold that you purchase today will be worth more Dollars in the future.
As with any type of investment or wealth building strategy, trying to protect against a weakening of the Dollar has inherent risks which should be carefully considered before any action is taken. Lending Club doesn’t favor any particular Dollar protection strategy and is not recommending any of the options discussed in this post. Everyone needs to evaluate their own situation and decide if they need to take action in this regard. Knowing that you have options, including those discussed in this post, is an important first step in that decision-making process.
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