Brad DeLong, who I’ve known since grade school and who writes a wonderful semi-daily journal, does not hedge as he puts into words something I’ve been wondering about for a couple of weeks: “why foreign exchange traders, gibbering in terror as they look at the U.S. trade deficit, haven’t dumped the dollar, pushing it down in value”. My answer to that question might lean a bit more on the traders’ belief that the Euro isn’t yet a reliable reserve currency — maybe there’s a shortage of perfect substitutes for the dollar. But if that’s right, it also follows that it should be a major objective of US fiscal policy to ensure that the dollar remains more attractive than the Euro. Even a partial switch to the Euro would be a catastrophic event (in both senses of the word). The Bush administration’s complacency on this issue appears to have one or more of these three causes: lack of imagination, lack of intelligence (that seems to be Brad’s guess), or the completely mendacious short-termism more commonly associated with barbarians looting the city.
But enough theory. Suppose I believe that the dollar is over (or under) valued. Short of buying foreign currency at ruinous bank rates, which then would require an account to hold them, or buying short term currency futures which expire too fast, what sort of foreign-currency-denominated asset is there that I can acquire on reasonable terms (small lots, low transactions costs)? Who markets currency hedges to households? Any single foreign stock or bond is too risky, if only because I am too ignorant to pick one. And the so-called foreign-currency bond funds on offer that invest in the major stable currencies (as opposed to emerging market funds) seem, when you look at them carefully, to hold amazing amounts of US government bonds. Many of them are also set up in ways that appear designed to allow speculation on medium- to long-term interest rate differentials rather than currency rates — you buy a dollar’s worth of the fund, and the price stays fixed, with returns fluctuating over time primarily as a result of changes in interest rates. Is there a market opportunty here, or is it already filled?