When it comes to international investments, a very important consideration is the currency in which the investment is being made, as this factor will have a direct impact on your final return.
For example, imagine that you bought an American share that cost US$100, and that at the moment 1 dollar is equivalent to 4 reais. So that share we mentioned earlier cost R$400.
Now think that the share has risen to US$110 and that 1 dollar is now worth 3.5 reais. This investment has generated you a profit in dollars of $10, but when we convert this to the real, we end up with R$385 (410 x 3.5 = 385). In other words, a loss of R$15.
Of all the world's currencies, why the dollar?
According to the International Monetary Fund, the US dollar is the most popular currency in the world. In the first quarter of 2019 it accounted for 61% of all known foreign exchange reserves held by central banks. This makes it the de facto global currency, even if it doesn't have an official title. The next currency is the euro, which accounts for 20% of central banks' known foreign currency reserves.
The strength of the US economy supports the value of the dollar, which is why the dollar is the most powerful currency. Around US$580 billion in US banknotes are used outside the country, representing 65% of all dollars. More than a third of the world's GDP (gross domestic product) comes from countries that peg their currencies to the dollar. This includes seven countries that have adopted the US dollar as their own. In addition, another 89 countries keep their currency in a tight trading range against the dollar.
In the foreign exchange market (Forex), the dollar dominates. Around 90% of trades on this market involve the US dollar. The dollar is only one of 185 currencies in the world, according to the International Organization for Standardization list, but most of these currencies are only used in their own countries.
Theoretically, any one of them could replace the dollar as the world currency, but it won't because it's not as widely traded. The chart below shows the 10 most traded currencies in 2018. Note that the total volume comes to 200%, because every currency exchange has a pair.
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Almost 40% of the world's debt is issued in dollars. As a result, foreign banks need a lot of money to do business, and this was evident during the 2008 financial crisis. Non-US banks had US$27 trillion in international liabilities denominated in foreign currencies and of this total, US$18 trillion was in US dollars. The financial crisis has made the dollar even more widely used. In 2017, banks in Japan, Germany, France and the UK had more liabilities denominated in dollars than in their own currencies.
All this just shows how strong the dollar is, and this strength is the reason why governments are willing to keep the dollar in their reserves.
Now that we've talked about why the dollar is such a strong currency, let's also talk about some ways in which you can dollarize your capital:
Buying paper money
Buying dollars in cash can be a way of diversifying your investments and having some protection against a possible crisis.
However, buying dollars in this format comes at a high cost. When you buy dollars from a foreign exchange broker, you have to pay fees, so you lose money on the difference between buying and selling the currency.
Not to mention the risk that many people run by leaving their money at home, where security is often not so high.
Foreign Exchange Funds
Exchange-traded funds are funds that invest in assets linked to foreign currencies. So, to have your investments dollarized, simply invest in a fund that invests in assets linked to the dollar.
Investing in foreign exchange funds can perform a similar function to buying paper currency directly, providing protection against times of greater stress on the global stage.
In addition, currency funds can be a great option if you are a person who travels constantly. By investing in this type of fund, you don't run the risk of leaving it too late to buy the dollar. People who leave it until the last minute to buy always run the risk of the currency skyrocketing and can often have to change their entire travel plans because of it.
And because these funds are passive funds, i.e. they follow a certain index, the management fees charged are usually not high.
Buy shares in companies with revenues in dollars
A clear example of this would be buying shares in companies that export commodities (products that act as raw materials). Basically, these companies have their expenses in reais and their income in dollars. So, in a scenario where the dollar is appreciating against the real, these companies end up making more money.
However, when buying shares in this type of company, the dollar is not the only variable. You also have to take into account all the other factors that influence the company's profitability. So if the dollar rises and the company's raw materials fall, it may not have a positive impact on its results.
Buying a property
Investing in US real estate, despite requiring a much larger initial investment than the other options and having less liquidity, can also be a great option when it comes to dollarizing your assets.
Real estate has long proved to be a good tool for hedging against inflation, since real estate is always appreciating in value over the long term. To read more about this, click here.
In addition, this type of investment gives you more stability compared to other riskier investments, and brings diversification to your portfolio.
If you want to invest in real estate in the USA, especially in the state of Florida, get in touch with our relationship agents. We can help you understand the entire bureaucratic process, from applying for a visa to buying an incredible home!
I have other questions! Who should I talk to?
In all these cases, The Florida Lounge can help you understand the impacts of events like this on the real estate market in Florida! Our relationship agents have expertise in real estate investment for Brazilians in the state of Florida and can accompany the entire process of acquiring your dream home, assisting with visa issues, bank accounts, remittances and much more. [/mpc_textblock][mpc_button mpc_tooltip__text="SW52aXN0YSUyMG5vJTIwc2VjdG9yJTBBaW1vYmlsaWFyaW8lMjBuYSUyMEZsb3JpZGE="]Did you like the article? Keep an eye on our blog! Looking to live or invest in real estate in Florida? See the list of houses for sale in Florida we've selected for you!
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