Banking » Investing » Hedge Yourself: 4 Foreign Currencies Alternative to the US Dollar
Advertiser Disclosure This website is an independent, advertising-supported comparison service. The product offers that appear on this site are from companies from which this website receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). This website does not include all card companies or all card offers available in the marketplace. This website may use other proprietary factors to impact card offer listings on the website such as consumer selection or the likelihood of the applicant’s credit approval. This allows us to maintain a full-time, editorial staff and work with finance experts you know and trust. The compensation we receive from advertisers does not influence the recommendations or advice our editorial team provides in our articles or otherwise impacts any of the editorial content on The Smart Investor. While we work hard to provide accurate and up to date information that we think you will find relevant, The Smart Investor does not and cannot guarantee that any information provided is complete and makes no representations or warranties in connection thereto, nor to the accuracy or applicability thereof. Learn more about how we review products and read our advertiser disclosure for how we make money. All products are presented without warranty.

Hedge Yourself: 4 Foreign Currencies Alternative to the US Dollar

Explore the benefits and risks of holding foreign currency as a US citizen and look at four currencies that could be a part of your portfolio
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: April 15, 2024
The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.
Author: Baruch Mann (Silvermann)
Baruch Mann (Silvermann)

Writer, Contributor

Experience

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Interest Rates Last Update: April 15, 2024

The banking product interest rates, including savings, CDs, and money market, are accurate as of this date.

We earn a commission from our partner links on this page. It doesn't affect the integrity of our unbiased, independent editorial staff. Transparency is a core value for us, read our advertiser disclosure and how we make money.

Table Of Content

There was a time not too long ago that the US Dollar was looked at as one of the most stable currencies in the world. In fact, foreign investors would flock to the US Dollar during times of instability in their own regions to have some semblance of safety.

Sadly, those days seem to be long gone. Nowadays, even US residents are actively looking for foreign currencies to diversify their holdings. We will look at why this is the case, how the US Dollar is different from when it was clearly the dominant world currency, and what’s next for the Dollar.

We will also explore the benefits and the risks of holding foreign currency as a US citizen and look at four currencies that could be a part of your portfolio if you do decide to go that route.

How the USD Became the Global Reserve Currency

After the first World War, the United States was arguably the strongest country in the world from a financial standpoint. As such, it began to lend money to nations that had been affected by the war. The borrowing only increased as time went on, maxing out during the second World War.

By 1944, the vast majority of the developed world owed large sums of money to the US. Although the nations had been using the Gold Standard until now, using it did not seem feasible anymore.

It was much easier to use a new economic system that would tether the currencies to the US Dollar, and the Dollar to gold. This is what was agreed upon at the Bretton Woods conference in 1944. This was also where the seeds for the IMF and World Bank were sown.

After this, the USD simply went from strength to strength. The US had by far the largest amount of gold in the world at that time and countries began to use it as a reserve currency as well as the main currency for world trade.

However, all of this began to change in the 1970s! With high inflation, countries began to demand gold back from the US so that they could stabilize their economy. President Nixon thought it better to take the US off the gold standard rather than deplete all its reserves.

Since then, the USD has been losing ground as the dominant world currency. While it still holds that title comfortably, Russia and China have begun making efforts to dethrone the USD as the global reserve currency by reducing their exposure, purchasing gold, and conducting trades in their own currencies rather than the Dollar.

 2016 Q12017 Q12018 Q12019 Q12020 Q1
Total Foreign Exchange Reserves10,935,497.3210,912,279.9811,617,665.7611,610,768.0111,731,944.26
Shares of U.S. dollars65.46%64.69%62.79%61.73%61.99%
Shares of euro19.55%19.28%20.36%20.27%20.05%
Shares of Chinese renminbi 1.07%1.40%1.95%2.02%
Shares of Japanese yen3.68%4.54%4.59%5.36%5.70%
Shares of pounds sterling4.63%4.27%4.67%4.55%4.43%
Shares of Australian dollars1.72%1.77%1.70%1.67%1.55%
Shares of Canadian dollars1.81%1.90%1.86%1.91%1.78%
Shares of Swiss francs0.19%0.17%0.17%0.14%0.15%
Shares of other currencies2.96%2.32%2.45%2.42%2.33%

The share of the USD has been declining as a foreign reserve currency, whereas the Renminbi has been rising. Source: World Bank

What Makes a Currency Strong?

Before we dive into the specifics that may cause you to look at alternate currencies, let’s take a look at how the strength of a currency is determined.

Political and Economic Stability

This is something that should be quite self-explanatory. Countries with a stable economic and political environment usually end up becoming safe havens for investors whose own currency is riskier. Even in 2022, over 59% of the world’s reserves are in USD.

Not only that, but the US treasury securities are considered to be the safest investments in the entire world and are used as a benchmark against which the risk/return of other investments is compared.

Foreign Reserves and Trade

The amount of trading that a country does directly impacts the strength of its currency. For example, the vast majority of crude oil across the world is traded in USD. Because of this, countries need to maintain sufficient reserves of USD in order to be able to purchase crude oil when they require it.

The need to maintain reserves in a particular currency increases its demand, thereby increasing its price as well as strengthening it relative to other currencies. On top of this, it is in the interest of the countries that hold a particular currency as a reserve to prevent its value from plummeting.

As such, the vast majority of the world buys the USD during a crisis as upholding its value is as important for other countries as it is for the United States.

major-foreign-holders-of-us-treasury-securities-

China, despite being in a trade war with the US, still has vested interests within the country. As such, even China would prefer to keep the USD strong, at least for a few more years.

Size of Economy

A currency is simply a representation of the economy of a particular country. Usually, the larger the economy, the stronger the currency. In 2017, the US had more than 24% of the entire world’s GDP. However, this number has been constantly decreasing as China and other countries catch up.

It is expected that the gap between the GDP of the US and China would reduce to less than $5 Trillion within the next 5 years. In fact, while the US has the strongest GDP in the world in nominal terms, China’s is actually much higher when you look at the GDP in terms of purchasing power parity. This is one of the reasons why investors are looking for alternatives to the USD.

Why is the USD Risky?

While we have already discussed some of the factors that make the USD risky heading into the future, let’s take a look at some of the other factors that are causing investors to worry about the Dollar’s role as a safe-haven investment.

  • Since the Dollar is used as a reserve currency, the US often ends up bailing foreign institutions in order to protect its own interests. With the economy being fragile due to the pandemic, this could happen again very soon.
  • The total government debt was $30 Trillion by 2022. The US is by far the most indebted nation on earth. This naturally leads to people being wary of the currency.
  • The government further exacerbated this problem through its COVID-19 economic rescue package. The package will require the government to print trillions of dollars. With the government already deeply in debt, investors are skeptical as to the future of the Dollar.
  • With other governments (especially in the Eastern hemisphere) moving away from the Dollar, alternative safe havens such as gold are beginning to seem much more attractive than ever before.

Benefits and Risks of Holding Foreign Currency

If you are an investor who plans to hold a significant portion of their wealth in cash, then you should definitely look at exploring foreign currency.

The biggest advantage is diversification. Chances are that you already own a lot of investments that are denominated in the Dollar. For example, you are already massively exposed to the Dollar if you own US stocks or treasury securities. If the dollar does end up going down, the value of all of these securities will go tumble downward with it.

There are a lot of currencies for you to choose from. However, the Chinese renminbi is probably not the safest option. For one, China is in a trade war with the USA. Despite the Dollar being riskier than ever before, it is still the strongest currency in the world, and the US government will probably retaliate with all their might to protect its interests.

There are a lot of other currencies that you can take a look at. These currencies will allow you to hedge against any political risks as well as any risks that may arise due to the triggering of a certain event.

For example, COVID-19 hit the US much harder than the rest of the world. While the full impact of the pandemic on the Dollar is not apparent as of yet, investors who are properly hedged will obviously sleep better.

Let’s take a look at 4 currencies that are probably a good idea for investors looking to diversify their cash holdings.

Top Offers From Our Partners

Chase_logo

Promotion:
$300 New Chase checking customers enjoy a $300 bonus when you open a Chase Total Checking® account and make direct deposits totaling $500 or more within 90 days of coupon enrollment.. Expired on 7/24/2024
Chase Overdraft Assist
With Chase Overdraft AssistSM, you won’t be charged an Overdraft Fee if you’re overdrawn by $50 or less at the end of the business day OR if you’re overdrawn by more than $50 and you bring your account balance to overdrawn by $50 or less at the end of the next business day

UpgradeLogo

Fees:
No monthly fees No monthly fees and no overdraft fees. Plus get reimbursed for ATM fees with an active account 
Rewards:
Up to 2% cash back Up to 2% cash back on common everyday expenses for active accounts with monthly $1,000 direct deposit, and up to 1% cash back for other purchases 
Promotion:
$300 Use Promo Code “AXOS300” for a $300 bonus when you apply for a Rewards Checking account
Up to 3.30% APY
to get the maximum rate (up to $50,000) you'll need monthly direct deposits of $1,500 (0.40% APY), 10 transaction on your debit card (+0.30% APY), average daily balance of $2,500 on Axos Invest Managed Portfolio (+1.00% APY), average daily balance of $2,500 on Axos Invest Self Directed Trading Account(+1.00% APY) and make full monthly payment on loans (mortgage, personal and auto) with Axos account (+0.60% APY).

PNC bank logo

Promotion:
Up to $400 Open a new, select Virtual Wallet product and receive $500/$2,000/$5,000 or more in qualifying monthly direct deposits within 60 days to earn a $100/$200/$400 bonus.
Subject to state availability
PNC Virtual Wallet ® is available in AL, AZ, CA, CO, DC, DE, FL, GA, IL, IN, KY, MD, MI, NC, NJ, NY, NM, OH, PA, SC, TX, VA, WI, and WV. Virtual Wallet ® is offered in the state of MO with the exception of the Greater Kansas City area. Product availability may vary based on where you open your account and the Zip code of your primary address.

Promotion:
Up to $4,000 New customers may earn up to $4,000 when they open an eligible HSBC Premier checking account from January 8, 2024 through March 27, 2024 and complete qualifying activities:

• Receive a cash bonus of $1,500 when you deposit or invest $100,000 – $199,999.99

• Receive a cash bonus of $2,000 when you deposit or invest $200,000 – $299,999.99

• Receive a cash bonus of $2,500 when you deposit or invest $300,000 – 499,999.99

• Receive a cash bonus of $3,500 when you deposit or invest $500,000+

• Earn an extra $500 when you set up recurring monthly Direct Deposits totaling at least $5,000 for 3 months
Wealth Products & Advice
Get access to wealth products, insights and advice from an HSBC Financial Professional through HSBC Securities (USA) Inc
Advertiser Disclosure
The product offers that appear on this site are from companies from which this website receives compensation.

1. Australian Dollar

The AUD is simultaneously similar and different to the USD. Australia, while not as strong economically as the US, is a developed country with an inherently stable political system. In fact, the AUD/USD pairing is one of the most common ones on forex platforms.

Obviously, we are not talking about forex trading here. Even as a safe haven, the Australian dollar has some clout. The AUD fell by quite a bit when the pandemic hit the world in full force. However, it has risen over 20% since its low point on 19th March.

The Australian government has a history of not intervening in the currency markets, stable but high-interest rates, and encouraging trade with its Asian neighbors. Being a country that is rich in natural resources including raw food produce, gold, and oil, Australia seems like a compelling investment. The higher interest rates should point to a higher return on capital, and the

The New Zealand Dollar has always been volatile. It seems to perform especially worse during an economic crisis.

Throughout its history, the NZD has had a lot of ups and downs. As such, it is not an ideal currency for conservative investors. That said, it does hold its value quite well in the long run. Its strength usually relates to tourism and the price of milk (New Zealand is one of the largest exporters of milk worldwide). As such, the currency is a good idea for active investors looking for above-average returns.

3. Canadian Dollar

In many ways, the Canadian Dollar is the closest you can get to investing in the USD without actually investing in the US. Canada is another country with a currency that is considered stable. However, unlike the US whose stability seems to emerge from its currency being the global reserve, Canada’s stability seems to emerge from its stable economic policies.

Canada has been praised for its moderate approach to business, thus making it a favorable spot for companies looking to expand operations in the developed world. The currency has also been considered as a safe haven historically. When you couple this with the fact that it is the sixth most common reserve currency (increasing currently), you see why the CAD is a great currency to own.

However, do remember that the US economy also has a significant direct impact on the CAD. This is because the US and Canada are huge trading partners. Apart from this, the main way Canada makes money is through the export of commodities. As such, rising commodity prices usually lead to a stronger CAD and vice versa. Oil is perhaps the most important one, as we have seen it impact the currency not only in 2022 but also in 2015.

4. Swiss Franc

The last currency we are going to take a look at is the Swiss Franc. The CHF, along with Switzerland in general, is considered to be a safe haven by the entire world. This has been proven time and time again. We saw multiple European nations rush to Swiss banks to store their wealth in the form of Swiss Francs during the European Debt Crisis. Prior to that, we saw people forgo assets in the US and purchase Swiss ones during the financial crisis.

Swiss banks, institutions and companies are known for their secrecy as well as the deregulated nature in which they are run. On top of that, Switzerland has perhaps the most stable government in the entire world. A perfect example of this can be seen in the fact that they have stayed neutral for centuries, even through some of the largest conflicts in the world.

During the war, they have a strict policy of doing business with all the combatants, regardless of who they think is in the right. On top of this, Switzerland has one of the most formidable armies in the world, making sure that the invasion of the country to loot its wealth is not a possibility.

Its strong financial background makes the CHF and assets that are backed by the guarantee of the Swiss government as some of the safest in the world. If you are someone who is looking to preserve their wealth (or a portion of their wealth) in the event of a global economic crisis, then the Swiss Franc is definitely the way to go!

 

Conclusion

We just went through a few reasons why the USD may not be as safe as it once was. After that, we took a look at 4 alternative currencies that are similar to the Dollar in some regards but may allow you an appropriate amount of diversification.

If you are looking for a safe currency, then the Swiss Franc is obviously the best bet. The Australian and the Canadian Dollars are for people who want a currency which somewhat similar to the US Dollar, but they do not want exposure to the activities of the US government. The New Zealand Dollar, on the other hand, is probably best for activist investors looking to turn a significant profit through their cash holdings.

Top Gold Brokers From Our Partners

APMEX

  • Leader in the Precious Metals industry
  • Over 1 million customers
  • Authorized Purchaser of the US Mint

OneGold

  • Direct ownership of vaulted metals
  • Buy, sell, and redeem, 24/7
  • Fully Insured Against Theft or Loss

BGASC

  • Fastest shipping times 
  • Extensive Product Offering
  • ZERO complaints with the BBB

Advertiser Disclosure

The product offers that appear on this site are from companies from which this website receives compensation. 

Buy Gold and Silver Online

  • Leader in the Precious Metals industry
  • Over 1 million customers
  • Authorized Purchaser of the US Mint

Advertiser Disclosure

The product offers that appear on this site are from companies from which this website receives compensation. 

Picture of Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Baruch Silvermann is a financial expert, experienced analyst, and founder of The Smart Investor.  Silvermann has contributed to Yahoo Finance and cited as an authoritative source in financial outlets like Forbes, Business Insider, CNBC Select, CNET, Bankrate, Fox Business, The Street, and more.
Search
Banking Reviews
Best Banking Accounts
Savings Accounts
Top Offers From Our Partners

UpgradeLogo

Savings Rate: 5.21% APY
Minimum Deposit:
$0
 
CIT-Bank-Logo
Savings Rate: 5.00% APY
Minimum Deposit:
$5,000
Quontic bank logo
Savings Rate: 4.50% APY
Minimum Deposit:
$100
 
Advertiser Disclosure
The product offers that appear on this site are from companies from which this website receives compensation.
Top Offers From Our Partners

Chase_logo

Promotion:
$300 New Chase checking customers enjoy a $300 bonus when you open a Chase Total Checking® account and make direct deposits totaling $500 or more within 90 days of coupon enrollment.. Expired on 7/24/2024
Chase Overdraft Assist
With Chase Overdraft AssistSM, you won’t be charged an Overdraft Fee if you’re overdrawn by $50 or less at the end of the business day OR if you’re overdrawn by more than $50 and you bring your account balance to overdrawn by $50 or less at the end of the next business day

UpgradeLogo

Fees:
No monthly fees No monthly fees and no overdraft fees. Plus get reimbursed for ATM fees with an active account 
Rewards:
Up to 2% cash back Up to 2% cash back on common everyday expenses for active accounts with monthly $1,000 direct deposit, and up to 1% cash back for other purchases 

Promotion:
$300 Use Promo Code “AXOS300” for a $300 bonus when you apply for a Rewards Checking account
Up to 3.30% APY
to get the maximum rate (up to $50,000) you’ll need monthly direct deposits of $1,500 (0.40% APY), 10 transaction on your debit card (+0.30% APY), average daily balance of $2,500 on Axos Invest Managed Portfolio (+1.00% APY), average daily balance of $2,500 on Axos Invest Self Directed Trading Account(+1.00% APY) and make full monthly payment on loans (mortgage, personal and auto) with Axos account (+0.60% APY).

PNC bank logo

Promotion:
Up to $400 Open a new, select Virtual Wallet product and receive $500/$2,000/$5,000 or more in qualifying monthly direct deposits within 60 days to earn a $100/$200/$400 bonus.
Subject to state availability
PNC Virtual Wallet ® is available in AL, AZ, CA, CO, DC, DE, FL, GA, IL, IN, KY, MD, MI, NC, NJ, NY, NM, OH, PA, SC, TX, VA, WI, and WV. Virtual Wallet ® is offered in the state of MO with the exception of the Greater Kansas City area. Product availability may vary based on where you open your account and the Zip code of your primary address.

penfed personal loan

APY on Daily Balances
0.15% APY on daily balances of less than $20,000 or 0.35% APY on daily balances of $20,000 up to $50,000
Get paid up to 2 days early
Set up direct deposits and get your paycheck up to 2 days early

Promotion:
Up to $4,000 New customers may earn up to $4,000 when they open an eligible HSBC Premier checking account from January 8, 2024 through March 27, 2024 and complete qualifying activities:

• Receive a cash bonus of $1,500 when you deposit or invest $100,000 – $199,999.99

• Receive a cash bonus of $2,000 when you deposit or invest $200,000 – $299,999.99

• Receive a cash bonus of $2,500 when you deposit or invest $300,000 – 499,999.99

• Receive a cash bonus of $3,500 when you deposit or invest $500,000+

• Earn an extra $500 when you set up recurring monthly Direct Deposits totaling at least $5,000 for 3 months
Wealth Products & Advice
Get access to wealth products, insights and advice from an HSBC Financial Professional through HSBC Securities (USA) Inc
Advertiser Disclosure
The product offers that appear on this site are from companies from which this website receives compensation.

#1 In Banking

Our Newsletter

Get expert advice, insider tips, fresh banking promotions and rate changes on savings accounts and CDs

Banking Promotions & Latest Rate Updates

Our Banking Newsletter

Sign up for our newsletter and gain access to expert advice,
insider knowledge, and exclusive updates