The Best Way to Invest in the US Dollar

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There are four main types of assets investors trade in – equities, bonds, commodities, and currencies. Equities and bonds are relatively easy to invest in while commodities can be done through mutual funds and ETFs, but investing in currencies is usually the domain of large institutional investors.

While there are a number of currencies investors can trade, the largest is without a doubt the US dollar. But other than simply holding cash in hand, investors may not be aware of how to actually take advantage of the ups and downs that the value of the US dollar experiences.

Betting on the dollar

As a global standard of trade, the US dollar is held by virtually every country in the world. As such, the value of the dollar is important not only to the US but also to other countries that own US debt – a drop in the value of the dollar means a drop in the value of those assets. As of the beginning of 2018, the total amount of US debt held by foreign governments surpassed $15 trillion with another $5 trillion owned by the US government itself through trust funds dedicated to programs such as social security and Medicare.

One way to invest in the dollar is through the same medium foreign governments use – treasuries. These government-backed debt securities are 100% backed by the US dollar so its value is tied to the strength of the dollar. However, treasuries come with low yields compared to other types of investments so only very conservative investors should consider trading in treasuries.

Another way to invest in the dollar is through ETFs. Instead of trying to play the futures market themselves, investors can take advantage of ETFs which establish positions in futures contracts without investors needing to take on that kind of risk. And because ETF’s trade like stocks, it makes them a popular option for investing in the US dollar.

Forex trading is one of the most popular ways to trade currencies. But it’s dependent on trading the dollar relative to another currency. Unless you’re familiar with foreign interest rates, central banks, and strategies like a carry trade, investing directly in currencies is a highly risky maneuver.

Of course one of the simplest ways to invest in the dollar is to invest in companies that are primarily dependent on the US economy. Focusing on domestic companies means taking full advantage of US dollar strengths – however, during times of dollar weakness, it may be best to invest in international holdings or companies that derive their profits from overseas instead.

Final considerations

One thing investors need to keep in mind when investing in the US dollar is how it is valued relative to other currencies. The US dollar can’t grow stronger or weaker in a vacuum – it can only do so against a foreign currency. Keeping abreast of interest rates in other countries could help you gain an edge when investing in the US dollar.