What the Crashing Dollar Means for You

Forget the usual assortment of feel-good seasonal flicks, because Mr. Bernanke is placing a copy of Night of the Living Dead into everyone's stocking this year. In this remake, Bernanke can be seen firing a barrage of bullets at an ornery zombie which continues to advance as he runs out of ammunition.

Unfortunately, while Mr. Bernanke attacks the credit crisis with rapid-fire liquidity and free money after this week's target rate cut to just 0.0%-0.25%, his bullets have caused some serious collateral damage. In the crossfire, the reserve currency of the world has received a nasty wound.

The U.S. dollar has been ill for some time, staging a major retreat in recent years. If you've never paid attention to the U.S. dollar index before, I recommend keeping a close eye on it going forward. Initiated in 1973 as the world adjusted to Nixon's closing of the gold window, the dollar index -- USDX -- is a weighted average value of the greenback against an assortment of foreign currencies. As the index declines, so too does the purchasing power of the bills in your wallet or purse.

After moving sideways for much of 2008, the USDX staged a huge rally from August through November. What made the rally so surprising to this Fool was that it continued even while the fundamental picture for the currency deteriorated as trillions of dollars were fired at the financial crisis to save companies like AIG (NYSE: AIG  ) and Citigroup (NYSE: C  ) from the brink of collapse. We'll save the causes of the rally for another day, but what's important now is that the dollar rally has reversed course with a vengeance.

In just a matter of days, the USDX has plummeted. Bernanke's rate cut Tuesday appears to have accelerated the retreat, and in my opinion risks a snowballing effect where foreign holders of dollar assets may opt to divest holdings of a tumbling currency.

As the dollar falls, gold rises. Gold has risen nearly $100 from its December low near $750, while miners like Goldcorp (NYSE: GG  ) and Newmont Mining (NYSE: NEM  ) have risen sharply. Intermediate miners like Yamana Gold (NYSE: AUY  ) and Agnico-Eagle Mines (NYSE: AEM  ) have promptly doubled from their near-term lows, and silver purchaser Silver Wheaton (NYSE: SLW  ) has also doubled from its October low.

Stay tuned, Fools! The dollar may not be celebrating a very Happy New Year.

Further Foolishness:

Thankfully, one need not convert out of the currency to find some protection from a falling dollar. The Motley Fool Global Gains newsletter team is constantly scouring the globe to identify terrific investment opportunities for Fools who wish to diversify out of the domestic markets, and they're ready to share their findings with you.

Fool contributor Christopher Barker captains yachts and writes about stocks. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Agnico-Eagle Mines, Silver Wheaton, and Yamana Gold. The Motley Fool has a dollar-wary disclosure policy.


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