Last week, the dollar fell to a 14-year low against the Japanese yen. Two days ago, the Wall Street Journal reported that central banks across the globe are frantically trying to hold their currencies down as the dollar continues its slide.

The news is ubiquitous -- the dollar is doomed, and America's mighty currency is on a slippery slope downward. In the wake of such pessimistic news, investors are left wondering whether they're overexposed to international stocks, or whether they should be even more diversified.

Before we answer that question, let's take a look at why the dollar is definitely going to drop, and how you can best position yourself to take advantage of the fall.

I've fallen and I can't get up
A few weeks ago, the dollar sagged to a 15-month low against a basket of major currencies. According to analysts, the outlook for 2010 seems to be just as dreary as things are now.


On Nov. 4, the Federal Reserve announced that the target federal funds rate will be set at 0%-0.25% for "an extended period." With interest rates that low, foreign investors will continue borrowing in the U.S. and investing abroad, where they can obtain higher returns. Additional investment abroad pushes up the currencies of foreign markets, thus keeping the value of the dollar down. Until interest rates rise, which doesn't seem likely to occur any time too soon, investors will continue investing elsewhere, and the dollar will keep sinking.

In addition, emerging markets have recovered from the financial collapse much more quickly than most developed markets. While some domestic stocks like (NASDAQ:PCLN) and (NYSE:CRM) have seen impressive returns year to date, emerging-market stocks such as Baidu (NYSE:BIDU), China Automotive Systems, and Petrobras (NYSE:PBR) have, as a group, outperformed. Look at the return of these indices in comparison with the S&P 500:


Return since Dec. 31, 2008

Return +/- S&P 500

China (SSEB)



India (BSE)






Taiwan (TWI)



The rapid influx of capital into emerging markets such as China, India, and Brazil will push up their currencies as asset prices tend to increase over time. This will also keep the dollar down.

What's the dollar to do?
Nobel Laureate and author Paul Krugman has said, "Although there has been a lot of doomsaying about the falling dollar, that decline is actually both natural and desirable." George Soros agrees. So does Warren Buffett. I'm no expert, but those guys certainly know a thing or two.

A weak dollar helps U.S. exporters by making their goods more competitive, which will inevitably boost domestic production for those companies that don't buy the majority of their raw materials abroad. This will likely stimulate the economy and improve unemployment.

A weak dollar will also help us rein in the enormous trade deficit we've been carrying for years.

Although there are definitely varying viewpoints on the pros and cons of our trade deficit, it's certainly better to borrow less from abroad to fund consumption at home. Any sort of deleveraging is a good sign for our economy.

In other words, the question at hand isn't whether or not the dollar will continue to decline, or whether or not that decline is a good thing. The question that matters to you is, how can investors take advantage of the situation?

Lower greenback, higher returns?
Since it looks like developing markets will continue their spectacular rise, you might benefit by investing directly in foreign equities, or multinational companies that generate substantial revenue abroad.

However, there's an even better way to capitalize on the fall of the dollar: Purchase small-cap U.S. companies with international exposure.

While large-caps like PepsiCo (NYSE:PEP) and Yum! Brands (NYSE:YUM), which earn more than 30% of their revenues abroad, should see nice bumps in sales, small or midsize companies will benefit disproportionately, because increases in exports will have a greater effect on their bottom lines.

To that end, you'll want to look for small- or mid-cap companies with at least 20% of revenue from abroad, and limited debt, so they'll be able take advantage of international expansion.

For instance, check out Dynamic Materials (NASDAQ:BOOM) -- a Colorado-based company that provides specialized explosion-welded plates and services. Dynamic Materials earns more than 60% of its revenue abroad, from Brazil to China to Norway -- and it's operating with a paltry 25% long-term debt-to-capital ratio. It's perfectly placed to take advantage of a falling U.S. dollar.

Our Motley Fool Hidden Gems analysts are constantly looking for small-cap stocks that are poised to outperform. While significant foreign revenue certainly isn't the only criterion our team looks for in a stock, at least six of the companies in our real-money portfolio -- yes, the Fool puts its money where its mouth is -- have greater than 40% international revenue.

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Fool contributor Jordan DiPietro owns no shares of the companies listed above. Dynamic Materials is a Motley Fool Hidden Gems pick. Baidu and are Rule Breakers recommendations. is a Stock Advisor choice. PepsiCo and Petrobras are Income Investor selections. The Fool owns shares of Dynamic Materials. The Fool has a disclosure policy.