Published: October 8, 2007

It's no secret that the U.S. dollar has been in a precipitous slide lately. In fact, the greenback slipped to parity with the Canadian dollar for the first time in 30 years last month, and also tumbled to all-time new lows against the euro.

As a result, it now takes about $1.40 worth of U.S. currency to buy a single euro -- up from about $0.83 in early 2002. In other words, the same 200 euro per night Paris hotel room that cost $166 five years ago will now set you back about $280. Fortunately, what's bad news for the U.S. traveler can be great news for the U.S. investor.

The dollar has been pressured by a number of macroeconomic factors, such as a ballooning domestic trade deficit. In fact, the U.S. imported about $760 billion more than we exported last year -- that's equal to about 6% of the nation's entire GDP. And of course, the Fed's recent half-point rate cut has only added fuel to the fire -- lower interest rates make dollar-denominated debt less attractive to foreign investors.

Whatever the underlying cause, many economists expect the dollar to remain weak, and forward-thinking investors like Warren Buffett have already taken steps to cash in on the downfall of the dollar. So what can you do to take advantage? Here are five places to focus your search:

1.)  U.S. Multinationals -- Domestic companies find that a falling dollar makes their exported products cheaper to consumer in foreign markets. Therefore, U.S-based firms shipping goods overseas can see a boost to their business. Plus, domestic companies earning a good chunk of their revenues in foreign markets will enjoy a boost from favorable currency translation when all those sales are counted up and converted back into U.S. dollars.

2.)  Foreign Stocks -- Suppose you invested 10,000 euros ($8,300) in a European stock in 2002. Even if the share price went nowhere, thanks to a falling dollar you could sell the shares, and those same 10,000 euros would now be worth $14,000. That's almost a +70% gain from the currency fluctuation alone -- with no share price appreciation. Of course, most foreign stocks have been surging lately, which would make the gains even more dramatic.

Keep in mind, though, that just as a weak dollar makes exported goods cheaper overseas, it makes imported goods (like Japanese cars) more expensive for American consumers. Therefore, it might be better to avoid foreign firms with large exposure to U.S. markets.

3.)  Foreign Currency -- Perhaps the most direct way to benefit from a falling dollar is with futures and other derivatives, through which investors can bet on the future price movements of an underlying asset -- in this case the dollar. Another option is the foreign exchange (or Forex) market, where all of the world's currencies are traded 24 hours a day. However, we would exercise caution when contemplating these volatile instruments, as they are more speculation than investing.

4.)  ETF Currency Funds -- The explosive growth of the ETF market has given individual investors access to certain asset classes that were previously the exclusive realm of institutional investors. Today, ETF investors can invest in funds that track a single foreign currency, like the Mexican peso or the Swiss franc, or those tied to a broad basket of currencies. These funds can be quite volatile, so again we would recommend caution, but they are worth considering given the current environment.

5.)  Commodities -- Many commodities, such as crude oil, corn, and copper are priced in dollars. So when the greenback deteriorates, dollar-denominated commodities become more attractive to foreign investors holding stronger currencies. A weaker dollar also tends to be inflationary, creating a favorable environment for gold and other metals. Simply put, the prices of many commodities can be expected to move inversely to the dollar. It's not a coincidence that as the dollar has plunged, gold has soared above $745 per ounce (its highest level in nearly three decades), while crude has reached record highs above the $80 per barrel mark.

Those who have broad exposure to the asset classes above should be well-positioned to cash in should the dollar continue losing strength against other foreign currencies.

Nathan Slaughter
Editor
Half-Priced Stocks

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About Nathan Slaughter

Nathan Slaughter has developed a long and successful track record over the years by investing primarily in deeply discounted securities. He uses advanced discounted cash flow techniques, along with a host of fundamental research, to uncover quality stocks that are trading well below their actual intrinsic value.

Nathan's previous experience includes a long tenure at AXA/Equitable Advisors, where he provided comprehensive investment advisory services to small businesses and high net-worth clients. He also honed his research skills at Morgan Keegan, where he performed asset allocation, retirement planning, and consultative portfolio management services.

Several years ago Nathan switched gears and decided to devote his time exclusively to financial analysis and writing. He has since published hundreds of articles for a variety of prominent online and print publications, and he now writes exclusively for StreetAuthority.com.

Nathan's educational background includes NASD series 6, 7, 63, & 65 certifications, as well as a degree in Finance/Investment Management. He currently resides in Shreveport, LA with wife Julie and sons Aidan and Riley. 

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