The dollar has dropped a huge amount in the past several years, against many of the major currencies. Of course, the real time to start worrying about the dollar was seven years ago, when it sat at levels 50% higher against the euro. But even after such a significant drop, these days, you'd have a hard time finding someone who’s truly bullish on the U.S. dollar.
Why money moves
Economics tells us that currencies rise and fall against one another because of inflation. And of course, the late economist Milton Friedman noted that "inflation is always and everywhere a monetary phenomenon."
So while currencies clearly tend to be beasts of fear and greed, their movements are based on something. Currencies move down when traders believe that the economy in one country will be more inflationary than in others. High inflation, in other words, means a devalued currency. At least, that's the way they draw it up in economics class. Frankly, currency trading doesn't interest me that much. Investing in stocks based on the most likely outcome for currencies, on the other hand, interests me very much. In my role as advisor for our international-investing service, Motley Fool Global Gains, I do this sort of analysis a lot.
The dollar's never-ending drop
You might think that, after the dollar has dropped so much, its most likely path would be upward. However, the American current account deficit sat at 5.05% of GDP at the end of the first quarter this year. There are fixes to this, mainly revolving around raising American savings rates and decreasing government spending, but the most likely path is the further debasement of the dollar. (See Warren Buffett's essay on "Squanderville" for a simple explanation.)
I don't know what's going to happen. In the words of Albert Einstein, "I never think of the future -- it comes soon enough." But I do spend a great deal of time thinking about things that ought to happen.
Of course, this isn't as easy as simply buying a bunch of international firms.
Buy companies with the right exposure
Let me explain. If you wanted to avoid exposure to the U.S. dollar, you wouldn't want to hedge by putting your money into Indian programming giant Infosys Technologies
You would garner much more protection against a potential dollar decline owning Columbus, Ga.-based Aflac
But what about companies with almost no exposure to the dollar? In Global Gains, I recommended shares in Taiwan-based GigaMedia
I know this
One shouldn't necessarily build one's investment portfolio on the basis of economists' prognostications. As a group, their accuracy records make soothsayers look positively prescient in comparison.
But by the same measure, if you're living in the U.S., getting paid in U.S. dollars, and (increasingly) buying goods produced overseas, there's a great deal of benefit to building in some diversity of exposure to other currencies through your investment portfolio. Think of it this way -- if these companies stay absolutely still, and the dollar does continue to drop, you'll still make money.