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Hi all,

I'm trying to broaden my knowledge and learn more about bond investing. I've got a question about dollar-denominated foreign bonds. What I've read is that if you think the dollar will weaken, dollar denominated foreign bonds are a bad idea. But wouldn't that just make it easier for the issuing country to pay the debt, since it's now effectively cheaper? Or is the problem just that there isn't currency diversification, since your loan is being repaid in worthless dollars instead of expensive reals or something? Thanks.
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I think its all about the buying power of the dollar when you get the cash. If the dollar is stronger against the foreign currency of the issuer, the issuer pays more to fund your dollar investment. So it costs him more, but for you if the dollar buys more you are ahead.

But what happens to the price of world commodities? Will they have the same value in say the Euro? Or in the US dollar? Or be somewhere in between? The right answer can vary with the commodity and the currency.

So you are taking on currency risk trying to make profits. But then the value of everything you own changes every day. So how do you avoid playing this game--whether or not you are aware of it?

You would much rather be holding a currency that is strengthening than one that is weakening. During periods of rapid inflation as in South America, people cashed their paychecks immediately and put the funds in stronger currencies or bought materials that could be sold for more later. You would not ever keep funds in a bank account over night in the local currency.

While inflation is moderate, it is less of a concern. If inflation heats up, it could become a serious concern.
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Thanks for the response. I asked because I'm looking at the emerging market bond ETFs (EMB and PYC), which are dollar denominated. My thoughts would be that if the dollar weakens against EM currencies, that would be helpful to any issuing country that might have solvency issues (i.e. I'd rather be paid in a weakening currency than have my debtor just flat out default). But in reading about these funds, I saw some comments that they would be bad in a dollar-weakening environment, without explanation. If the worry is just that the payments are worth less on the global scale, I'm not terribly concerned, as pretty much all of my purchases are dollar-denominated anyway, so I'm not really going to notice (I'm not exactly expecting third-world country inflation in the dollar). I was mostly worried that it would be a problem in terms of affecting default risk or somehow screwing with the actual pricing of the bond in some way similar to interest rate risk, but I couldn't understand how either could be the case.
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The potential exists for a double hit. If the issuing country(ies) start raising rates your ETF is going to take a principal hit and if the dollar weakens against that currency you are going to get hit again or one or the other can harm your position. The inverse is also true.

If we build a simple matrix of possible outcomes we might get a better look

Currency move Interest move gain/loss
EMB against USD raises rates lose-lose
for USD raises rates win-lose
against USD lower rates lose-win
for USD lower rates win-win

There are more funds available now that are in local currency. It takes a bit of digging to find them. The advantage to these is that you can bring the money home when the currency exchange is more in your favor, meanwhile you are at the same risk as every other investor in that nations bonds.

The difference may not matter to you.

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you could use a chart to see where EMB has been in relation to the US dollar. I used DXY in the link. Change to PYC on top of DXY and you get pretty much the same response. I understand that DXY is not an emerging market currency basket, so likely you could find a better proxy.

still, the chart seems to say these things mirror the US dollar.

For years before the flashcrash, EMB tracked the ups and downs of the S&P500. However, since the flashcrash, EMB has held, while the S&P has dropped.

interesting way to play the emerging markets debt, thanks for bringing it up.

anyone interested in this, to me, a most confusing subject, might enjoy this free pub from the old UBS called "Foreign Exchange and Money Market Transactions". this link does not load correctly, or at least not for me.

this link does load correctly:

Ti (short the euro and the S&P just now but mostly in <4yr USTs via Hussman's managed sortofabond fund HSTRX)
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