Multi Currency Sandwich Update

The last update Asset Allocation Shift at this site reviewed how I have altered my total portfolio allocation to:

US $ Real Estate 50%

Non US Equities 3%

Emerging Bonds 11%

Bonds 26%

Ecuador Real Estate (for sale) 15%

US$ Short -5%

This is the first time I have leveraged my portfolio since April or May of 2007.

I borrowed US dollars and feel comfortable doing so.

An article by David Lynch in today’s USA Today entitled “Weak dollar raises talk of alternative world currency” explains why.

Here are some excerpts from that article:

Just about every day seems to bring more bad news for the dollar. Recent months have witnessed a steady erosion in the greenback’s value, down 16% since March against the currencies of the top U.S. trading partners. On Wednesday, the euro broke through the symbolically important $1.50 barrier for the first time in 14 months.

Depending on whom you believe, a dollar hovering near its 52-week low represents either the market’s devastating verdict on the Obama administration’s profligacy or a salutary rediscovery of risk by newly emboldened investors.

Maybe it’s a bit of both. But the downbeat drumbeat bangs on. Chinese officials openly worry about taking a bath on their enormous U.S. Treasury holdings. Foreign bankers talk of promoting an alternative global currency, such as the euro, yuan or a new synthetic medium of exchange cooked up by the International Monetary Fund.

In the U.S., some voices on the right, such as Rep. Michele Bachmann, R-Minn., detect an anti-American conspiracy to scuttle the dollar. But the roster of those opining on the dollar’s woes includes establishmentarians such as Robert Zoellick, president of the World Bank and a former top official in Republican administrations. “Looking forward, there will increasingly be other options to the dollar,” he warned last month.

In March, Chinese Central Bank chief Zhou Xiaochuan proposed shifting global finance to a reliance on a new international reserve currency rather than the dollar or any other national unit. The aim would be to avoid the periodic crises that have characterized recent decades. But Zhou acknowledged that any such change would take “a long time.”

For now, the dollar’s fundamental standing remains what it’s been for decades: a convenient medium of exchange for buyers and sellers around the world. Just as Chinese merchants speak the global language of English when trading with Saudi oil barons, they use the global currency to buy the oil. “The reserve currency is a natural monopoly. It’s so convenient to list prices in a single currency,” says Harvard University’s Rogoff, co-author of This Time Is Different, a study of financial crises.

In the short run, the only currency that could challenge the dollar is the euro. It, too, has a continental-size economy behind it, and a decade after its introduction, the European currency has established itself as a fully convertible, stable store of value.

But for all its attractions, the euro lacks some essential attributes. Although the European Union has a central bank, comparable to the Federal Reserve, there is no European treasury. Instead, there are 27 European treasuries. Investors can’t easily track or influence fiscal policy on the continent.

There’s another potential dollar rival on the horizon, though its day likely lies a decade or more in the future. Just as the United States overtook the British empire, China’s economy one day is likely to pass the U.S.’s. When it does, the yuan would be in position to fill the dollar’s global role.

But before it does, China will have to thoroughly overhaul its existing financial system. Today, the yuan isn’t freely convertible into other currencies, and there are strict limits on the cross-border movement of the Chinese currency. Chinese officials publicly have committed themselves to freeing the yuan to float alongside the dollar, euro, yen and other major currencies. That change, however, won’t happen overnight.

Even if foreign investors have concerns about having so much of their national wealth tied up in dollars, there is a limit to what they can do about it in the short run.

Further to fall

The dollar’s long-run prognosis is negative. In the wake of the crisis, a retrenchment in cross-border financial flows will mean less demand for dollar-denominated assets. And with Uncle Sam’s printing press running overtime to cover the government’s trillion-dollar budget deficits, the currency is expected to be further cheapened, says Eichengreen.

The decline in the dollar’s value in the past seven months largely reflects an unwinding of the “flight to quality” that occurred during the most panicked crisis phase. Amid unprecedented levels of uncertainty late last year, investors flocked to assets denominated in the largest, most liquid currency. That drove the dollar’s value against the euro, for example, up about 13% over the three months ended in March.

Since then, the euro has regained the lost ground and then some. A euro, which settled at $1.50 Wednesday, was at $1.43 in December.

That said, neither the euro nor Japanese yen have had anything to celebrate. The biggest beneficiaries of the move out of dollars since March have been currencies of countries that heavily export raw materials, such as the Australian dollar (up 33% against the greenback) and the Canadian loonie (up 21%).

This is a good article (see a link to the entire article below) but one comment is ever so wrong!

The comment is: Even if foreign investors have concerns about having so much of their national wealth tied up in dollars, there is a limit to what they can do about it in the short run.

There are many ways to protect against the US dollar’s fall… which is why I borrowed dollars and invested in the Mexican peso, Australian and New Zealand dollar.

The multi currency sandwich employees the benefit of positive carry. In other words you get paid to borrow dollars.

Look for example at a $150,000 investment that leverages one time with borrowed dollars.

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