In ancient Rome, money literally wasn’t what it used to be. Emperors kept mixing cheap metals into the silver denarius, and before long, merchants noticed their coins were losing weight and thus buying less grain and wine each year. This may be one of history’s first lessons in currency and commodity risk: if the value of your money can melt away like a Roman coin in a hot forge, you’ve got a problem. Today, we investors face a more modern version of that problem, worrying about the U.S. dollar’s ups and downs, global inflation, and the price of oil and other commodities.
Understanding Currency and Commodity Risk
Currency risk (also called exchange-rate risk) is the possibility of losing money due to unfavorable shifts in exchange rates. If you hold assets or do business across borders, a sudden drop in a foreign currency’s value can shrink your returns when converted back to dollars. Commodity risk is similar – it’s the chance that commodity price swings (like oil or gold prices surging or plummeting) will cause economic losses. For example, if you own an airline stock and oil prices spike, fuel costs soar, and that stock might suffer. Both forms of risk boil down to uncertainty in purchasing power: currency fluctuations affect what your dollars can buy abroad, while commodity changes affect the costs of goods and the value of hard assets.
The Mighty Dollar: Strong But Not Infallible
The U.S. dollar today is the world’s reigning currency heavyweight, but even heavyweights can slip. The dollar enjoys reserve-currency status: roughly 58% of global foreign reserves are held in U.S. dollars. 1 This dominance, built on America’s economic strength and trust in its stability, often makes the dollar very strong. In fact, in 2022, the dollar hit its highest level in two decades against other major currencies. https://www.reuters.com/markets/europe/dollar-ascendant-investors-gear-up-fed-2022-09-21
But the dollar is not invincible. Its value rises and falls based on economic conditions, interest rates, and global confidence. In 2023, the dollar actually weakened as foreign investors questioned U.S. financial prospects. 2
History also shows that no currency stays king forever. The British pound reigned for centuries before Uncle Sam took over. While the U.S. dollar isn’t about to vanish, other nations are attempting to reduce their reliance on it, and a global shift away from the dollar could lead to broad U.S. asset underperformance and a weaker dollar worldwide. 3
If the dollar’s status were significantly undermined, our stock and bond markets could take a hit, and the greenback in your pocket would likely buy less. I’m not forecasting doom as Wall Street still views the dollar losing reserve status as a remote risk. 4 But as investors, it would behoove us to remain mindful that the dollar, while strong, can decline.
Inflation, De-Dollarization, and Your Retirement
Why do these currency and commodity moves matter so much for your retirement? In a word: inflation.
Imagine that you’re retired and decide to go on a trip to Europe. In mid-2023, one euro cost around $1.09, and, at the time of writing, it’s about $1.15. 5 That means if you budgeted $10,000 for a European vacation in 2023 and left today, the currency shift alone could add hundreds of dollars to your trip.
Inflation erodes the real value of your dollars. If your portfolio doesn’t keep up, you can afford less over time. A high inflation environment (or a sharp dollar drop) is especially painful for retirees on fixed incomes.
De-dollarization (the world using fewer dollars) also hits close to home for your portfolio. If global investors don’t need as many dollars, demand for U.S. assets could fall. J.P. Morgan analysts warn this could “crack the central pillar” of dollar strength, leading to lower foreign investment in U.S. stocks and bonds. 6
In retirement terms, a weaker dollar might mean lower returns on your U.S.-centric portfolio, especially when measured against rising foreign markets. It could also mean higher U.S. inflation (since imports cost more) and higher interest rates. The last thing we want is your hard-earned wealth caught in a pincer of rising prices and falling asset values.
So inflation and currency changes directly affect how far your retirement savings will go. Our goal is to preserve your purchasing power and the generational wealth you plan to pass on. To do that, we employ hedging strategies against these risks. Let’s talk about how.
Hedging Currency Exposure
One key hedge is diversification into foreign investments. If the U.S. dollar weakens, investments denominated in stronger foreign currencies can help offset the loss. For example, if you own European or Asian equities and the dollar falls, the value of those international stocks typically rises in U.S. dollar terms. 7 It’s a natural buffer. In fact, foreign stocks have often outperformed during periods of U.S. dollar weakness. 8 You therefore may want to hold a healthy allocation of international equities, not only for growth potential but explicitly to hedge currency risk.
Another approach is using currency-focused exchange-traded funds (ETFs). If you have large exposure to, say, the euro or the Japanese yen through overseas holdings or business interests, you can buy currency ETFs that rise when those currencies rise against the dollar. There are even U.S. dollar index ETFs that go up if the dollar strengthens, useful if you need to hedge a potential decline in foreign currencies.
For most retirees, though, a more straightforward path is investing in broad international stock or bond funds, which naturally include the currency hedge benefit. Many currency-hedged funds also exist. These are funds that invest overseas but use derivatives to neutralize currency movements. They can be useful in specific cases, but note that currency-hedged ETFs and mutual funds certainly aren’t fee-free, and in fact, they could even reduce gains and be more costly than other investments due to high trading fees.
Gold, Oil, and Other Inflation Hedges
When people think of hedging against inflation and currency declines, gold often leaps to mind, with images of gold bars stashed in vaults. Gold and other commodities like oil have a special place in hedging strategy as they often zig when the dollar zags. Commodities are essentially real assets, so they increase in value when inflation rises, helping preserve purchasing power when paper assets falter. 9
In other words, if the prices of goods and services are climbing (inflation), the prices of raw materials (commodities) are usually climbing too.
That said, commodities are an insurance policy, not a free lunch. They can be volatile and unpredictable. Gold, for instance, went from $850 in 1980 to under $300 in 2000, and at the time of writing, it is worth $3303.84. 10 Even in times of high prices, gold generally can’t keep up with stocks that represent entities that generate profit, as evidenced by the Dow’s growth compared to gold between 1990 and 2020.
Data Sources
Gold vs S&P 500 Comparison: Curvo Historical Backtest
Unlike stocks or real estate, commodities usually don’t produce income, which affects their long-term growth potential. It’s primarily a hedge, not a growth engine. They can potentially protect your portfolio when inflation rises or the dollar dives, but we shouldn’t overdo it.
Staying Diversified for the Long Run
Ultimately, hedging currency and commodity risks is part of a broader philosophy of diversification. By holding a mix of asset classes – domestic and international stocks, bonds, real assets, and maybe some alternatives – you spread out your exposure. The goal isn’t to maximize gains in the short term; it’s to preserve and grow your purchasing power steadily over the long term, so you can maintain your lifestyle through retirement and leave a lasting legacy.
When designing a retirement portfolio, you may want to include assets specifically for their hedge value. For example, Treasury Inflation-Protected Securities (TIPS) for inflation protection, a healthy allocation to international equities for currency diversification, and a bit of gold or commodities for real asset exposure. These hedges are woven into the fabric of the portfolio. This kind of thoughtful asset mix means that no matter where inflation or currency shocks come from, a part of your portfolio is set to cushion the blow.
In Conclusion
We’ve covered how Roman emperors debased their coins, how the mighty dollar could stumble, and why your European vacation budget keeps growing. The thread connecting all of this is simple. At the end of the day, your purchasing power matters more than your account balance. With this knowledge, it quickly becomes clear we shouldn’t ignore currency and commodity risks when the dollar’s strength isn’t guaranteed.
If you’re wondering where your portfolio stands against currency risks, seeking out expert advice could quell your fears. Sometimes the best hedge is simply knowing you’re properly positioned.
Feel free to set up a meeting by clicking the button below. We’re here to help ensure your money retains its buying power and that your wealth continues to work for you and your family for generations. Let’s keep your plans on track – and as solid as a gold Roman coin.
- https://corporate.vanguard.com/content/corporatesite/us/en/corp/articles/why-us-dollar-remains-reserve-currency-leader.html#:~:text=Aliaga,liquid%2C%20so%20it%20remains%20dominant
- https://www.kiplinger.com/retirement/the-role-of-the-u-s-dollar-in-retirement-is-it-secure#:~:text=This%20year%2C%20the%20dollar%20has,investment%20dollars%20is%20being%20questioned
- https://www.kiplinger.com/retirement/the-role-of-the-u-s-dollar-in-retirement-is-it-secure#:~:text=dominance%3F%E2%80%9D
- https://www.kiplinger.com/retirement/the-role-of-the-u-s-dollar-in-retirement-is-it-secure#:~:text=While%20every%20Wall%20Street%20pro,status%20is%20called%20into%20question
- https://fred.stlouisfed.org/data/DEXUSEU#:~:text=2025
- https://www.kiplinger.com/retirement/the-role-of-the-u-s-dollar-in-retirement-is-it-secure#:~:text=Goldman%20Sachs%20said%20in%20a,%E2%80%9D
- https://www.investopedia.com/terms/c/currencyrisk.asp#:~:text=Important
- https://www.investopedia.com/terms/c/currencyrisk.asp#:~:text=Important
- https://www.investopedia.com/articles/trading/05/021605.asp#:~:text=Commodities%20are%20used%20to%20diversify,when%20most%20other%20investments%20struggle
- https://www.metalsdaily.com/live-prices/gold/
