How to hedge currency risk when firing abroad

[vagavince]

Hello

I was wondering if I need to hedge currency risk. If so, how do I do it

My situation is as follow.
-US portfolio. Firing abroad (mostly likely permanent)
-Foreign bank doesn’t allows investment account due to US tax reporting
-Firing abroad so on going obligation and debt in foreign currency
-Will need a significant down payment in foreign currency for mortgage
-local CD interest rate is much lower than US bond

My thoughts
-maybe international allocations in US portfolio is enough?
-maybe buy currency options to protect against US dollar weakening?

Is currency risk something I should worry about? Are there anything I can do?

[deborah]

What do you intend to do in the long run? Stay forever in the other country, or go back to the us for your twilight years, or don’t you know and want to leave your options open?

[former player]

It's something you are right to think about.  The extent to which you need to worry depends on the currency you will be spending and the likelihood of future changes in that economy as against the USA.  And, as deborah says, whether this is a one-time move or potentially you will be going back to a USA currency area at any point, for instance if the exchange rate becomes unviable.

Is it just one bank that doesn't allow USA citizens to invest or all the reputable financial institutions?  (Be very wary of anyone offering a way around restrictions that reputable banks apply: the chances of a scam are high.)

The one thing that occurs to me is that you could invest in real estate or a business in your new location.

[vagavince]

What do you intend to do in the long run? Stay forever in the other country, or go back to the us for your twilight years, or don’t you know and want to leave your options open?

Good question. I’m not sure. Currently plan to stay abroad indefinitely

[habanero]

If you have US denominated assets but live in another country and plan to do so indefinetly and have substantial expensens in this other currency you have significant foreign exchange risk in your life. It might not matter in the long run, but the long run can be a very long time.

Where in the world are you planning on settling? Its probably a lot easier (and cheaper) to handle this if its say somewhere in the Eurozone than if its in some minor country somewhere in Asia.

[habanero]

Is it just one bank that doesn't allow USA citizens to invest or all the reputable financial institutions?  (Be very wary of anyone offering a way around restrictions that reputable banks apply: the chances of a scam are high.)

Its very common due to the US tax reporting requirements. One of the fist questions you get asked when doing anything in a Europan bank is if you're a US citizen.

[GilesMM]

I would have a look at long-term trends in the exchange rate in question.  When the currency is weak, stock up on it.  Maybe convert five years expenses into local currency.  When the currency is strong, spend from your local stash.  When it is in between just convert your dollars.  I have done this effectively in a couple countries with somewhat predictable currency behavior (I'm not talking about Venezuela or Cuba or anything).  You can also get some amazing bank interest rates in countries with high inflation.

[habanero]

If you as a US citizen move to Euroland it should be pretty easy to get decent local currency exposure on parts of your stash in an US investment account. One is by buying a US-listed equity fund/ETF with European exposure that does not hedge its FX risk, that effectively means you get capital gains/losses and dividends in Euros (+ maybe some GBP and other smaller currencies) albeit yoiu will need to exchange into EUR yourself as you go. If the USD weakens, the USD value of this fund will go up and conversely it will got down if the USD appreciates.

It should also be fairly straightforward to get bond exposure in Euros, a lot of US-based companies issue debt denominated in EUR, but one problem here might be that they require a fairly large minimum purchase per bond making diversification difficult. Buying EUR-denominated government bonds is maybe easier and there is also likely to be an ETF tracking that, but for it to be actual EUR exposure it needs to be something that doesnt hedge its FX risk which bond funds tend to do.

Same principle applies to any place, but the choice of ways to do it is more limited the smaller the economy you are moving to.

If you live in a country but have no income in local currency to cover running costs of living you have substantial FX risk.