Acquiring Foreign Property — FX Question

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NYC_Guy
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Acquiring Foreign Property — FX Question

Post by NYC_Guy »

I plan to buy property outside the US in about two years. The property will be purchased with euros. The source of those funds is currently in short term US treasuries.

My question for Bogleheads is how you would handle the foreign exchange decision. The USD/Euro exchange rate is a bit on the high side (1.2 USD to 1 euro) relative to near term rates. I have the ability to exchange at Fidelity for between 20 bps and 75 bps over the wholesale midpoint, so my concern isn’t how to exchange. It’s when.

This isn’t like timing the equity markets (where the long term upward trend in the markets makes lump sum investing a superior risk adjusted decision). Would you DCA into those euros over the next two years? Would you wait until the end of the period to purchase the euros? Would you look for favorable dips in the exchange rate?
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typical.investor
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Re: Acquiring Foreign Property — FX Question

Post by typical.investor »

NYC_Guy wrote: Thu May 06, 2021 11:20 am I plan to buy property outside the US in about two years. The property will be purchased with euros. The source of those funds is currently in short term US treasuries.
Vacation home? Are you changing your investment currency (ie. moving in retirement)? How much does it matter if you pick a strategy that doesn't work? Can you sell more investments to make up the difference or will you possibly be locked out of getting in the area you really need to?

My question for Bogleheads is how you would handle the foreign exchange decision. The USD/Euro exchange rate is a bit on the high side (1.2 USD to 1 euro) relative to near term rates. I have the ability to exchange at Fidelity for between 20 bps and 75 bps over the wholesale midpoint, so my concern isn’t how to exchange. It’s when.[/quote]

Kinda depends on how much. I've never exchanged more than $250k so I guess that's my limit for upper end at once. I tend to not worry about exchange rates though.
NYC_Guy wrote: Thu May 06, 2021 11:20 am This isn’t like timing the equity markets (where the long term upward trend in the markets makes lump sum investing a superior risk adjusted decision). Would you DCA into those euros over the next two years? Would you wait until the end of the period to purchase the euros? Would you look for favorable dips in the exchange rate?
I'd look for favorable dips, but you never know if it will get more favorable.

In any case, EUR/USD is strongly influenced by the difference in rates between Germany and the US. If the US hits inflation, rates rise and the currency weakens, does it hurt that much if you are still in USD? I mean the higher yield on the USD should offset the strengthening of the EUR.

Of course, currencies move short term quickly so that relationship can't be relied on. In end, I might try to target 2-4 purchases at favorable dips (which get even more favorable the second you hit confirm on the order and which never become more favorable if wait or so it seems).

I'd probably end up holding some amount of treasuries until the purchase and if the EUR were quite strong, would probably sell some international stocks to make up the difference on the premise that some of my funds have a large percent of EURO zone countries which will have appreciated due to currency and if the USD fell that much, would need to rebalance anyway.

You might be talking more money than I have for a home though, and perhaps would need a more formal strategy.

Let us know what you end up doing and how it works out. Please update this thread!
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NYC_Guy
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Re: Acquiring Foreign Property — FX Question

Post by NYC_Guy »

Thanks. I will keep the thread updated.

To answer your questions, it will be a vacation property, probably in the €1.5 million range. I have some ability to absorb adverse fluctuations from now until the purchase (by either buying less, paying more or working an extra few months).
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grabiner
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Re: Acquiring Foreign Property — FX Question

Post by grabiner »

If you are definitely going to spend euros two years from now, the lowest-risk way to do that is to hedge now; this insulates you from any future exchange-rate risk. Assuming that the foreign exchange market is efficient, you might as well do that. Convert the dollars to euros now, and buy a euro bond or CD maturing at the right time.
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sperry8
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Re: Acquiring Foreign Property — FX Question

Post by sperry8 »

NYC_Guy wrote: Fri May 07, 2021 12:57 pm Thanks. I will keep the thread updated.

To answer your questions, it will be a vacation property, probably in the €1.5 million range. I have some ability to absorb adverse fluctuations from now until the purchase (by either buying less, paying more or working an extra few months).
I am in a similar situation to you, seeking to purchase in a few years. I have had a Euro bank account for over a decade and have watched those rates closely. Over the years most people got the direction of the Euro wrong. Back when I invested rappers were singing about the death of the dollar. Then in the middle years it was the death of the EuroZone. Now, it's USD inflation worries.

I've come to realize the best time to sell is when you need the money. In our case, that is when we are going to make the purchase. The only caveat to this is when something weird happens (like what happened last Mar 2020). Aussie dollar dropped momentarily to $.57... and if I were seeking to buy property would've slid in at that time (I wasn't, so I didn't). But if something pushed the Euro close to par with the USD, I'd move it over. Otherwise, I'll move money when I need it. Life changes, things happen. I'd hate to move over in advance and in anticipation of my future purchase only to discover through no fault of mine that I cannot buy and now my money is in devalued Euros (just listing a possibility).
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fogalog
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Re: Acquiring Foreign Property — FX Question

Post by fogalog »

NYC_Guy wrote: Fri May 07, 2021 12:57 pm Thanks. I will keep the thread updated.

To answer your questions, it will be a vacation property, probably in the €1.5 million range. I have some ability to absorb adverse fluctuations from now until the purchase (by either buying less, paying more or working an extra few months).
I have done the same - transferred money to buy property in Europe. I always assumed I cannot pick the high or low, and no matter the rate now, it can always get better or worse, so I have tended to transfer $100k at a time, over a period of a few months.

Good luck!
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Re: Acquiring Foreign Property — FX Question

Post by SQRT »

I am a Canadian. Bought a house in Arizona in 2012 for cash. Closing was about 3 months later and I didn’t want the FX risk for that period. Could have bought the USD at that point but it would have been expensive since there wasn’t a good way to earn interest on USD in Canada over the period to closing. So I entered into an FX forward contract with my bank. That is, I fixed the FX rate but didn’t have to actually purchase the funds until I needed it at close.

I don’t think I would worry about FX risk until I had contracted the deal though. Unless you were really sure of doing the deal and you really liked the current FX rate.
Last edited by SQRT on Sat May 08, 2021 4:24 pm, edited 2 times in total.
goos_news
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Re: Acquiring Foreign Property — FX Question

Post by goos_news »

We bought in France four years ago, and accelerated the process when the FX began to drift down to 1.05. We periodically exchange money. It becomes really difficult to predict the exchange rate. Besides the advice given by others, some people pick a number they are comfortable with and execute it. Another currency hedge is to source a Euro-denominated mortgage, if possible, in your target country (rates in France are sub 1.5%).
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