The U.S. dollar has been on a winning streak in recent months, with a few interruptions, against the euro, the yen, the pound and many other currencies. What does this mean for U.S. citizens living in countries with weakened currencies?
Financial advisers say the dollar’s rise is an opportunity—just not the type some people might expect. Most expats should resist the urge to buy lots of foreign cash on the cheap, advisers say. And think twice about diving into foreign property or equity markets, attractive as they might seem these days.
The problem with those moves, advisers say, is that they increase the risk of expats being burned by the inevitable further shifts in currency markets and in the value of big purchases.
Instead, expats can take this opportunity to improve their financial situation now and reduce their currency risk, experts say. For instance, they can reduce foreign-currency debt, or rebalance their holdings of dollars and foreign currency in a way that best suits their personal situation rather than the current state of the currency markets.
Jessica Williamson says the stronger dollar has made it cheaper for family and friends to visit her in the U.K. Photo: Louis Martineau
And sure, expats can go ahead and splurge a little on things that have suddenly come within reach of their budget, advisers say—as long as they don’t allow that spending to throw off their long-term financial plans.
Here are what advisers and longtime expats say are some key strategies to pursue in today’s strong-dollar environment.
“Those hoping to accelerate the repayment of foreign debts have just been handed a huge windfall,” says David Kuenzi, founding partner of Thun Financial Advisors in Madison, Wis., who works with U.S. expats.
With every dollar now translating into more foreign currency, expats with savings in U.S. dollars can use some of that money to shorten the life of mortgages, car loans or other foreign-currency debts, he says.
And paying down that debt has an added benefit. Expats need to be very careful about “currency misalignment”—having too much cash in either their home currency or the currency of the country in which they live and work—says Mr. Kuenzi. Sitting on big piles of cash in either currency exposes expats to fluctuations in currency markets, he says, so paying off foreign-currency debts can put cash to work and reduce that risk.
It can be a blessing and a curse. When the dollar rises, everything from taxi fares to meals to houses are cheaper in foreign markets for people with dollars to convert. But don’t let that trigger a spending spree, on small items or big investments, advisers say.
The biggest danger here is that big investments like real estate or major stock purchases may lose value not only because of shifting foreign-exchange rates but also because of turns in property and financial markets. For instance, U.S. expats who use the dollar’s strength to buy property abroad now might regret the decision later if they hope to resell the property at a nifty profit as part of a retirement plan, says François Du Pasquier, head of foreign exchange for Citigroup ’s Citi Private Bank North America.
Kristopher Heck, a managing partner at Tanager Wealth Management, a London firm that offers financial planning for trans-Atlantic households, warns of the similar risk in loading up on foreign stocks. A stronger dollar means this can be a good time to take on more exposure to foreign equities, but only with funds investors have set aside for high-risk investments, not with money they can’t afford to lose, Mr. Heck says. Investors should avoid getting overly excited and buying shares with funds that should stay out of the market, such as money from an emergency fund, he says.
Douglas Coombs, a U.S. expat in Colombia, says changes in the foreign-exchange rate have made his investment dollars go further at his startup. Photo: Raúl Alejandro Torres Ajiaco
Small-scale purchases can cause problems, too, advisers say, if they turn into budget busters. Douglas Coombs, a 29-year-old U.S. expat in Colombia, has faced that temptation. For the past three years, the entrepreneur has been living in Bogotá, but has kept most of his money in dollars. He is running a startup and has been using savings to fund the company. These days, he has been impressed to see how much farther his dollar goes—whether invested in his company or spent around town.
Restaurants, clothing and other consumer goods used to cost him more in Colombia than they did in the U.S. Now that his dollar is going further, Mr. Coombs finds himself going out to eat more often and indulging in expenses like Uber rides. But he’s careful not to let these cheaper goods and services derail his startup investment plans. Mr. Coombs says he now spends less than he used to personally, and has maintained his startup budget.
While it might be tempting to think about trading lots of dollars for the local currency to take advantage of the current market, doing so as an expat who only plans to be abroad for a short time—say, one or two years—is “silly and risky,” says Mr. Heck.
Instead of obsessing over each shift in the foreign-exchange markets, expats should focus on how long they plan to be abroad and convert their money based on those expectations, he says.
For example, expats who only expect to be abroad for a couple of years should only convert what U.S. cash they think they will need for that period above and beyond their incomes, he says. But those planning to be long-term expats may want to convert much more of their cash to the local currency, he says—even all of it in some cases—especially if they plan to buy a home in the next few months.
The basic idea is the same as Mr. Kuenzi’s advice about avoiding currency misalignment—money should be in the form it will be used in, so that as little as possible is exposed to the danger of losing value upon conversion.
The fun upside of the dollar’s rise is that travel is easier and cheaper for Americans abroad. Some expats say they are trying to time trips with family and friends around the current upswing to save money—and awkwardness.
“I used to feel so guilty when my family came to see me,” says Jessica Williamson, a director at the London office of Techstars, a startup accelerator with locations in the U.S. and Europe. Prices in the U.K. were so high in dollar terms that when her stepmother came to stay for two weeks a few years ago, she stayed in Ms. Williamson’s apartment to avoid a massive hotel bill.
For years, going out with friends and family from the States was stressful because it felt like a financial imposition on people. Now, Ms. Williamson feels more comfortable taking visitors out and having them pay their share of the bill.
Mr. Wells is a news editor for The Wall Street Journal in London. Email: firstname.lastname@example.org