I am a UK based investor and my spendings are 60%in GBP, 30% EUR and 10%CHF. My base currency at IBKR is USD and 100% of my liquid net worth is in US equity. I would like to remain invested exclusively in the US market and wonder what is the easiest or cheapest way to protect myself from a decline of the USD against by basket of currencies?
I would use the CME Currency Pairs. Regulated, liquid and easy to hold, option or roll over. Hope that helps.
Rolls are not the cheapest with IB. If you have a sizable portfolio I would open a second account with a highly reputable broker that offers leveraged cash fx with roll charges without any markups. That's your absolutely cheapest and most precise hedge. You would then end up paying 60 basis points to hedge your 60% usd exposure vs gbp and pay around 230 basis points per annum for your 30% usd exposure vs eur. I would keep the remaining 10% vs chf unhedged. All other options will be way more expensive and less precise.
I think the Euro is most correlated to the USD so buying out of the money calls on EUR future seems the most direct way. In a strange way if the USD were to drop it actually means the global economy is doing better so it would mean a better UK economy. Then you won't even need something to protect you. The USD isn't just another currency it is the world's reserve currency so it has a massive impact on the world economy and the value reflects that. I would say the USD will keep rising until the Fed stops raising rates due to higher unemployment in the US. Then the rate differential won't help the USD anymore so it will start to drop.
I don't understand your rational. First of all, the euro is not the most correlated with the US dollar by far. Even if it was, why would buying the out of the money call on Euro achieve the objective of a hedge? Second, how does a better UK economy help with OP's spending of pounds make hedging usd exposure moot? Lastly, currency rates reflect relative interest differentials to a large degree. Even if the Fed kept raising rates if the ecb came out and stated that it started to aggressively raise rates (which right now is highly unlikely) then the usd would be aggressively sold vs euro.
Similar situation. Assets in USD and EUR, spendings mostly in CHF. I use IBKR too with base currency CHF. I hedge with globex futures. Rollover not really an issue as spreads are tight on my pairs USDCHF CHFEUR (EURUSD). I highly doubt a forex broker is a better choice, imo most charge outrageous margin fees / overnight costs with high markups/-downs on interest rates.
Thanks M.W. - I was meaning to send you a DM with a few questions but will ask in public instead for the benefit of all. How would that work in practice if you wanted to hedge USD1m today? which contracts would purchase? with which broker? Tony