Long Term Dollar Decline and Living Outside the US

[Bryan Barnfellow]

My wife and I are currently FIRE'd and loving our life in Switzerland in terms of quality of life, natural and cultural environment, political and social tranquility, and easy travel to all the places we want to visit regularly.

However, about 80% of our income derives from investments in the US (and soon SS payments as well); so all are denominated in US dollars. I move funds quarterly to our Swiss bank account to pay our living expenses here and have to deal with the USD/Swiss Franc exhange pair. I have found the best strategy for this, so it is working fine now.

While the dollar has strengthened relative to the Franc in the past year, the overall trend in the pair has been decidedly against the dollar. It is trading today at 1.02 USD to 1.0 CHF. Long term economic projections seem to indicate a return in the next 10 years to the gradual decline of the USD. This, of course, sucks for us. The Swiss franc is a go to currency when there is fear in the world economy. Note: the USD in 1970 bought about 4.38 CHF. Today it buys 0.98 CHF.

So, for other expats or ER folks who are living abroad, especially those in it for the long term, how are you dealing with potential USD long term weakness against your own currency (if applicable)? Currency hedging is one option of course. Selling the US-based assets, where possible, and reinvesting in Swiss financial assets is another for me; but, leaving aside the conversion costs, including significant capital gains taxes, the expenses here remain high for investors and a significant portion of dividends are held back until they are claimed on the annual Swiss tax return.

I'm not feeling a rush to act right now; but would like to have a clear plan going forward -- it's a bit like the frog boiling slowly in a pot of water analogy. Your thoughts very much welcome! Thanks

-BB

[Blueskies123]

You sound fairly affluent. Why not just buy a bunch of Swiss francs or Euro’s now. BTW, why are you so certain the USD is in decline. Interest rates are going up.

[audreyh1]

The USD goes in cycles.

[Bryan Barnfellow]

Thanks. I would not say affluent; but somehow making it work here in this country, which is either #1 or #2 each year in the contest (with Norway) to be the most expensive in the world to live in. Salaries are higher here so it makes it all relative until you stop working and live on your savings. We would be much better off in the US or elsewhere; but our hearts are here now.

We don't have the wherewithal to buy a lot of francs; we depend on the quarterly cash flow.

-BB

[MichaelB]

Quote:

Originally Posted by Bryan Barnfellow I'm not feeling a rush to act right now; but would like to have a clear plan going forward -- it's a bit like the frog boiling slowly in a pot of water analogy. Your thoughts very much welcome! Thanks

No easy answer to this one. Speculating on future exchange rate is a great way to give your money away.

The currency rate between the franc and the $ shouldn't matter as much if the portfolio is well balanced geographically between the major global currency areas. Even though it is domiciled in the US, an investment in the Euro zone, for example, will track to both local equity performance and change in currency value. In fact, the cost of investing is lower in the US than elsewhere, so that might even be an advantage.

The downside to that, of course, is that asset appreciation due to currency is taxable in the US, while it would not be if it were local. Nonetheless, I think your best bet is a currency diversified portfolio.

[LARS]

No magic bullets. Fundamentally you've got mismatched asset to expenses as you know. If you’re in Suisse to the bitter end, I personally would sleep better knowing I’ve taken the currency risk out of the equation ESPECIALLY when it is Swiss Fr to US Dollar Risk (or any currency really).

Of course, if your US assets dwarf your realistic foreseeable Swiss Franc expense, have another Swiss chocolate bar and worry about your waistline instead....

[Bryan Barnfellow]

Quote:

Originally Posted by audreyh1 The USD goes in cycles.

Yes, short term ups/downs but on a steadily declining trend line versus the Swiss franc over the last 40-plus years. Here's a graph:

https://snbchf.com/wp-content/upload...F-Longterm.jpg

-BB

[Bryan Barnfellow]

Quote:

Originally Posted by MichaelB No easy answer to this one. Speculating on future exchange rate is a great way to give your money away. The currency rate between the franc and the $ shouldn't matter as much if the portfolio is well balanced geographically between the major global currency areas. Even though it is domiciled in the US, an investment in the Euro zone, for example, will track to both local equity performance and change in currency value. In fact, the cost of investing is lower in the US than elsewhere, so that might even be an advantage.

Thanks for these observations. I agree about the currency hedging -- I would rather not go there and am seeking to reduce risk, not add new ones.

With respect to moving the assets to Switzerland, it's a fact that the "blue chip" Swiss companies that I might invest in -- Nestle, Novartis, Roche, for example, derive the vast majority of their revenue outside of Switzerland, so owning them would not necessarily save me from the currency exchange issue; just remove it by one level. The geographical diversification among major currency zones is a better solution -- leaving the assets in the US is both cheaper and provides a more transparent investing environment than anywhere else in the world.

-BB

[OldShooter]

Quite a few years ago megacorp ran me though a sort of mini-MBA called "The Advanced Program for Directors." One module was a one-week residential session on international business and finance with some Harvard guys including Dave Yoffie, who has since become quite a big deal.

The important part of the presentation for me was their long term bearish view of the dollar. Their argument, which I believe, is that the dollar's value is held up by its status as the world's reserve currency, allowing us to run up a debt that would otherwise not be tolerated by the world's financiers. Further, they argued, this must eventually end.

"Eventually" can be a long time though. Since then we have seen candidate reserve currencies come and go, including a proposal that oil be priced in a basket of currencies including IIRC the ruble, the real and the yuan. More recently, the Russians have committed economic suicide, the Brits are pulling out of the EEC, the southern band of Euro countries have ruined the Euro's prospects, Argentina and Brazil are a mess, and no one trusts the Chinese. So the dollar really has no competitors. It is the tallest midget. Meanwhile our debt continues to rise.

I still believe that Yoffie et al will be proven right .... eventually. The world hates the dollar and the fact that the US can use our banking system as a political weapon. Plus much of the world hates us on general principles, aggravated by our current administration. But, there are no currently-viable currency options.

If I were outside the US, I would not overweight dollar-denominated assets in my portfolio and I might well underweight them. YMMV, of course.

[Bryan Barnfellow]

Thanks, OldShooter, for these good thoughts. It's hard not to feel the effects of the dollar's movements wherever one lives in the world; but one can at least try to mitigate. The problem, of course, is that global companies are swimming in multiple currencies, including especially the dollar, so it's a bit complex in terms of asset selection.

Living abroad as US citizens we have to deal with two tax systems, two currencies (often three--the Eurozone border and its cheaper shopping opportunities, is only a few miles away from us), and multiple languages (three major ones in Switzerland). But I wouldn't trade it at this point in my life. At the very least I think it is helping to grow some new neuronal connections in my brain!

-BB

[Bryan Barnfellow]

By the way, this is a basic summary about dollar value, that might be of interest to some.

https://www.thebalance.com/value-of-us-dollar-3306268

-BB

[Totoro]

Quote:

Originally Posted by Bryan Barnfellow The geographical diversification among major currency zones is a better solution

My solution too (Eurozone). You can't insulate yourself from the local currency risk efficiently, the country is simply too small. That and currency movements can go off base by as much as 30% and more for no obvious reasons, it's very chaotic.

For equity: the S&P 500 is already international, so that can still work. I use the MSCI world index myself. Same difference mostly.

For cash & bonds: convert it to CHF as much as possible. This is assuming a long term scenario in Switzerland.

[Danmar]

I have a similar but opposite problem. A lot of my expenses are in USD while all my income is in CDN dollars. Been this way for about 5-6 years and I have simply lived with the volatility. Have considered buying USD denominated assets, and buying forward FX contracts or swaps (out for a few years).

Really no easy solution for either of us. I think you might have to decide if living in Switzerland is worth the risk. Sounds to me you have decided that it is. Agree it would be a great place to live.

[alaska55]

Quote:

Originally Posted by Bryan Barnfellow Yes, short term ups/downs but on a steadily declining trend line versus the Swiss franc over the last 40-plus years. Here's a graph: https://snbchf.com/wp-content/upload...F-Longterm.jpg -BB

Why put a chart up that end in 2011. Since 2011 the USD is up against the Franc. When did you retire? I would say the trend has been broken. I would say your about even since you retired.

XE: USD / CHF Currency Chart. US Dollar to Swiss Franc Rates

[Go-NoGo]

Quote:

Originally Posted by alaska55 Why put a chart up that end in 2011. Since 2011 the USD is up against the Franc. When did you retire? I would say the trend has been broken. I would say your about even since you retired. XE: USD / CHF Currency Chart. US Dollar to Swiss Franc Rates

I believe the OP posted that image from the original article that was posted at this site:
https://snbchf.com/chf/chf-history/long-term-view/

The Story IMO is not the decline of the dollar vs CHF but more like appreciation of the CHF vs almost all currencies in the world. There are many reasons why this has occurred - Switzerland as a tax evasion haven (well until recently - the US, Germany, and France among others have taken a hard line) and fined Swiss banks billions $$$. Also the liquidity of CHF market << USD or EUR

You can check how the CHF has fared against major currencies in the long term at this site.

fxtop:
Historical exchange rates from 1953 with graph and charts

USD:CHF
Historical exchange rates from 1953 with graph and charts

EUR:CHF (Euro prior to 1999 may be a composite of DM, Franc etc.)
Historical exchange rates from 1953 with graph and charts

CNY:CHF
Historical exchange rates from 1953 with graph and charts

regards

Go-NoGo

[Sunset]

Be glad you didn't have your money in some other country market that had gone down compared to USD, like Canada.

Since you don't want to move your money to where you live, you will face this currency risk all the time. Either you move the money, or yourself, that is all the choices I see.

[Alan]

Happily I have been on the other side of the coin just when I needed it. The £ fell 25% against the $ just as we were moving to the UK and needed to move lots of money to buy a house in England.

Because of the US tax system it is not sensible to move lots of money and invest in UK stock and share funds because the US treats all foreign funds as PFICs and taxes them heavily, whereas many US funds, including all of Vanguard ETFs report into HMRC and receive the favorable tax treatment for qualified dividends and capital gains.

My pensions are mostly from the US so while I have been enjoying a huge pay rise for the last 18 months I don’t expect it will last forever unless the £ never recovers against the $.

[audreyh1]

Quote:

Originally Posted by alaska55 Why put a chart up that end in 2011. Since 2011 the USD is up against the Franc. When did you retire? I would say the trend has been broken. I would say your about even since you retired. XE: USD / CHF Currency Chart. US Dollar to Swiss Franc Rates

Thank you. Something didn't look right but I'm not a CHF expert, whereas I follow the EUR since we visit annually and I have family there.

[DJRR]

Assume there exists options on futures for CHF? Not sure what the premiums/trading costs are, but perhaps it is a cheaper way to "hedge" against a move that would materially impact your lifestyle.

Unfortunately it is a win/lose situation and you never know what side of the equation you will be on. I guess I would try and accumulate enough CHF in cash to maintain my lifestyle a few months. Maybe skim a few hundred bucks a month to dollar cost average the rate? Assume you are using a no foreign transaction fee US credit card that gives you a good rate on the exchanges you have to make.

[haha]

Quote:

Originally Posted by Alan Because of the US tax system it is not sensible to move lots of money and invest in UK stock and share funds because the US treats all foreign funds as PFICs and taxes them heavily,

I understand how this applies to funds and etfs, but individual stocks?

Ha