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 you bought an American stock that cost US$100, and that at this moment 1 dollar is equivalent to 4 reals. So this stock we mentioned earlier cost R$400.
Now think that the stock has appreciated to US$110 and that 1 dollar is now worth R3.5. This investment gave you a dollar profit of $10, but when we convert this to real, we will end up with R$385 (410 x 3.5 = 385). In other words, a loss of R$15.
Of all the currencies in the world, why the dollar?
According to the International Monetary Fund, the US dollar is the world's most popular currency. In the first quarter of 2019 it accounted for 61% of all known central bank foreign exchange reserves. This makes it the de facto global currency, even if it has no official title. The next currency is the euro, which accounts for 20% of known foreign currency reserves of central banks.
The strength of the US economy supports the value of the dollar, which is why the dollar is the most powerful currency. About US$580 billion in US notes 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, 89 other countries keep their currency in a tight trading range against the dollar.
In the foreign exchange (Forex) market, the dollar dominates. About 90% of the trades in 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 used only in their own countries.
Theoretically, any one could replace the dollar as the world currency, but it won't because it is 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 cash to do business, and this was evident during the 2008 financial crisis. Non-U.S. banks held $$27 trillion in international liabilities denominated in foreign currencies and of that total, $$18 trillion was in U.S. 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 hold the dollar in their reserves.
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Now that we have 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 the paper currency
Buying dollars in cash can be a way to diversify your investments while having some protection against a possible crisis.
However, buying dollars in this format has high costs. When buying dollars at a foreign exchange broker you have to pay fees, causing you to lose money on the difference between buying and selling currency.
Not to mention the risk that many people take by leaving their money at home, where security is often not as high.
Foreign Exchange Funds
Exchange traded funds are funds that invest in assets linked to foreign currencies. Therefore, to have your investments dollarized, you only need to invest in a fund that invests in assets linked to the dollar.
Investing in currency funds can perform a similar function to buying paper currency directly, providing a hedge against times of greater stress in the global scenario.
Furthermore, foreign exchange funds can be a great option if you are a person who travels constantly. By investing in this type of fund, you end up not running as much risk of leaving to buy dollars at the last minute. People who leave it until the last moment to buy always run the risk of the currency skyrocketing, and many times they may have to change their entire travel plan because of this.
And because these funds are passive funds, that is, they follow a certain index, the management fees charged are usually not high.
Buy stocks in companies that have revenues in dollars
A clear example of this would be buying shares in companies that export commodities (products that function 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 of this type of company, the dollar is not the only variable. It is also necessary to take into account all the other factors that influence the profitability of the company. Therefore, if the dollar rises and the raw material of the company in question falls, it may not have its result positively impacted by this.
Buying a property
Investing in US real estate, despite requiring a much larger initial investment than 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 to hedge against inflation, as real estate is always appreciating in value over the long term. To read more about this, click here.
Furthermore, this type of investment provides you with more stability in relation 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, please contact our relationship agents. We can help you understand the entire bureaucratic process, from visa application to the purchase of an incredible home!
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In all these cases, The Florida Lounge can help you understand the impacts of events like these 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 purchasing your dream home, assisting with visa issues, bank account, remittance of values and much more.