Money Sense: What to do with dollars

The United States dollar (USD) is seen worldwide as green gold for its stability as an asset. It is the world's major reference and trading currency.

However, even the mighty USD has buckled under selling pressure, particularly during the global financial crisis of 2008.

The USD's uncovered vulnerability presents a major problem to the millions of overseas Filiino workers sending funds back to the country, and who hold on to the currency as a safe haven or sometimes even as a lucrative investment. As a friend of mine once said to me, the USD is for one to hold—and to some, perhaps even to hoard.

Currency risk

Recently, I received an email from an OFW asking me if he should hold on to his USD investment, which he intended to use for his child's college tuition. My initial reply was to ask him if he planned to send his child to a university or college outside the Philippines. His answer was no.

I replied that if he plans to spend in Philippine pesos for the education of his child, then he is implicitly taking on currency risk in preparing for such education by holding on to his USD investment. Was he willing to take on such additional risk?

Investing in any particular security has its own risks. But if a person is investing in another currency while planning to spend the future value of his investment in pesos, he is taking on the additional risk of the currency he invested in being of lower value when converted back to pesos by the time he needs to pull out his money.

Viewing the USD as a safe investment is something that many Filipinos grew up with and have simply accepted as gospel truth. The rule particularly appealed to the limbic part of the brain that just wants quick answers. In fact, the rule was so appealing that people equated "safe haven" with being lucrative. And who could blame them for behaving that way, if they were able to buy and hoard USDs at P26:USD1 and later unload them at P56:USD1.  

But just like any good thing, the run of the USD against the Philippine peso did not last long.  The global financial crisis proved that the USD was not invincible. Consequently, many currencies, including the Philippine peso started appreciating against the USD—to the chagrin of US dollar earners.

So the cardinal rule of investing stays: high risk, high return; low risk, low return. The USD may still be lucrative as a currency investment, as some forex traders would vouch for. However, there are risks present.

So, the simple recommendation is that if a person does not want to take on currency risk, he should just keep enough USDs to cover for his spending in the same currency. The rest should be kept in the currency that they would actually be spent. Otherwise, be ready for a bumpy ride. — BM, GMA News

Efren Ll. Cruz is a registered financial planner, personal finance coach, seasoned investment adviser and bestselling author of “Pwede Na! The Complete Pinoy Guide to Personal Finance” and bestselling co-author of “Pwede Na! The Complete Pinoy Guide to Retirement and Estate Planning.” Questions about this article may be posted here, sent by SMS to 0917-505-0709 or emailed to efren@personalfinance.ph.