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By Jason Stipp | 07-18-2011 05:23 PM

Currency Hedge Could Take the Sting from Inflation

Having exposure to the foreign currencies of our biggest trading partners would have served as a very effective hedge against recent import-price inflation, says Oppenheimer's Alessio de Longis.

Alessio de Longis is a vice president at Oppenheimer and a manager on the Oppenheimer Currency Opportunities Fund.

Jason Stipp: Alessio, I want to turn the conversation a bit and talk about some of the tools that investors may look to keep ahead of inflation.

You folks at Oppenheimer have taken a look at the role of currencies in fighting inflation. A couple of questions on that front; the first is, obviously this has to do with the worries about the decline of the U.S. dollar, depreciation of the U.S. dollar, and what role that will play in the inflationary environment. Secondly, how do you think about the dynamics of currency as you're looking to take currency positions because we might see the U.S. dollar declining, but we also know that foreign countries have been somewhat reluctant to let their currencies appreciate because they still want to have competitive exports?

Alessio de Longis: Absolutely. The dollar plays a major role in the inflation story for the United States. Dollar depreciation is a major cause and a key driver of the rise in import price inflation. The economics are very simple. As the dollar loses value, we need to spend more dollars and pay higher prices to import the foreign goods that we consume every day.

Let me give you a couple of statistics. Over the last year alone, as we mentioned, import price inflation has been rising at about 13.5%, and the dollar has depreciated against a basket of currencies of our largest trading partners for about 10%. Those are the countries ... the depreciation of the dollar against the countries that we import most from is what matters with respect to the relationship to import price inflation.

And this is just not a near-term phenomenon. Over the last 10 years, the dynamics, the depreciation of the dollar against these large set of currencies of our major trading partners has had a correlation of more than 60% with the import price index.

So, you can clearly see how, over the last year alone for example, 10% depreciation versus 13.5% import price inflation, you can see how owning foreign currencies in your portfolio would have served as a very effective hedge against this type of inflation, against imported inflation.

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