THE CRUCIAL QUESTION
Is the US Dollar truly a perfect shield for your wealth?
The Scenario
For decades, the mandate in Latin America has been clear: “Move your money into dollars.” It is seen as a survival strategy against local instability. Investors view US assets—Apple shares, Treasury bonds—as a “luxurious ocean liner” compared to the “unstable local boat.” But is this liner immune to every storm? This infographic breaks down the invisible risks that arise from the interplay between your home economy and global dynamics.
1. The Sleeping Giant: FX Risk
Foreign Exchange (FX) risk is the most misunderstood factor. Investing in USD is like holding a glass of water; the water (USD) value is constant, but the container (Local Currency) changes size. If the USD weakens globally, your local purchasing power drops—a “silent devaluation.”
Fig 1. The “Inverse Transaction Risk”: A global weakening of the USD can result in a loss of local purchasing power even if the asset value in USD remains stable.
The “Glass of Water” Metaphor
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The Water (USD Investment) Value is constant in US terms ($1 = $1).
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The Container (Local Currency) Changes size. If COP/MXN appreciates, the container grows, and you need fewer units to fill it (Loss).
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Silent Devaluation You invest $1,000 at 3,000 COP. USD weakens to 2,800 COP. You lose 6.67% locally.
2. The FED: The Global Vacuum Cleaner
The Federal Reserve controls the global “faucet” of liquidity. When rates rise (Quantitative Tightening), the dollar becomes a “vacuum cleaner,” sucking capital back to the US and away from Emerging Markets (EM). This raises financing costs and triggers capital flight in LATAM.
Key Consequences
Cost of Financing
Credit becomes expensive for LATAM governments/companies.
Capital Flight
Investors flee EM assets for risk-free US Treasuries.
Imported Inflation
Local currencies weaken, making imports costlier.
3. The Paperwork Web: Tax Risks
The “Customs Office” represents local tax authorities. Agreements like FATCA mean offshore money is no longer invisible. Without planning, Double Taxation and Wealth Taxes can erode returns significantly.
Fig 3. Visualization of how tax obligations and lack of credits can reduce a nominal 10% gain to a much lower net return.
4. Market Wave: Concentration Risk
Many LATAM investors suffer from “Inverse Home Bias,” putting 100% of capital into US Tech (FAANG). This concentrates risk. A correction in US Tech combined with local currency appreciation is a “double threat.”
Fig 4. Risk vs. Reward profile. High concentration (Tech Only) leads to higher volatility compared to a Diversified Global Portfolio.
5. Mitigation: The “Chinese Ink” Portfolio
Risk (Wēijī) is Danger + Opportunity. To survive, you must build a portfolio that balances these forces.
Currency Hedge
Counteract USD weakness.
- • Commodities (Gold, Agri)
- • Real Estate outside US
Geo-Diversity
Dilute FED policy risk.
- • European Multinationals
- • Asian Infrastructure
- • Emerging Market Bonds
Smart Planning
Optimize Net Return.
- • Tax Credit Management
- • Dollar-Cost Averaging
- • Stop-Loss Limits
Conclusion
Investing in USD is a shield, not perfect armor. The difference between survival and prosperity lies in understanding the global playing field. Don’t settle for the myths—diversify, plan for taxes, and watch the FED.