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Alternatives to the Drooping Dollar

The Fed’s latest stimulus program, QE3, has boosted risky assets like stocks and commodities at the expense of the dollar. The greenback dropped 6.5% between late July– when investors became more certain the Fed would take action – through mid-September,  a  more precipitous decline than following the prior two rounds of stimulus. During that same time, the S&P 500 rose nearly 10%.

Behind the dollar’s decline was investors’ growing sense in midsummer that central banks on both sides of the Atlantic would take action. European Central Bank president Mario Draghi vowed to save the euro at all costs, sparking a rally in the currency. In the U.S., currency investors saw further stimulus by the Federal Reserve as increasingly likely and began to price in a devaluing of the dollar. As expected, the Fed launched its third round of so-called quantitative easing earlier this month, a program that will increase the money supply as the Fed buys mortgage bonds with money it has created.

The Fed’s aggressive moves to stimulate the economy spell long-term weakness for the dollar, many pros say. For them, it’s not too late to tweak portfolios to account for this decline. While various factors could cause the dollar to temporarily strengthen against the euro and other currencies — for example, mounting concern over the European debt crisis or escalating tensions in the Middle East could send investors running to the dollar as a safe haven — the currency’s long-term downward trajectory will continue, according to these dollar bears.

Many have looked to gold as the dollar began its slide this summer. Drew Kanaly, a financial adviser at Kanaly Trust in Houston, increased his clients’ allocations to gold through the SPDR Gold Shares exchange-traded fund (GLD).

Some have looked to capitalize on other currencies’ appreciation relative to the dollar. Donald Dempsey, a financial adviser in Williston, Vt., shifted part of his clients’ international bond portfolios out of the iShares JPMorgan USD Emerging Markets Bond fund (EMB) and into the WisdomTree Emerging Markets Local Debt fund (ELD). The former gives investors exposure to international bonds but not their currencies, whereas the latter does not hedge out, or erase, the currency risk. Many emerging-market currencies have rallied recently, and the WisdomTree fund allows investors to benefit from this appreciation along with any changes in the underlying bonds’ prices (in the opposite direction, investors get hurt if the currency declines).

Anthony Welch, manager of the $12.8 million Currency Strategies fund (FOREX), increased his exposure  in mid-July to the Canadian and Australian dollars, which have also recently outperformed the greenback. Both countries’ economies are heavily tied to commodities, many of which are priced in the U.S. dollar and tend to rally when the dollar declines. Over the past five years, the Canadian and Australian dollars have risen against both the euro and the U.S. dollar. (The U.S. dollar’s movements are often measured against the U.S. Dollar Index, a basket of other currencies of which the euro makes up 57%.)

To be sure, not all pros favor adjusting portfolios based on market direction. “Typically, advisers tweak things at exactly the wrong time, like their clients,” says Rick Kahler, president of Kahler Financial Group in Rapid City, S.D. Kahler gives his clients exposure to foreign currencies but doesn’t change the mix based on currency moves.

But for some, it makes sense to adjust portfolios to reflect America’s weakened economic position. Says Dempsey, “Longer-term, I have to feel safer with some of these emerging markets that are running surpluses.”


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    • Too late to exit out of the dollar assets now, most of other currencies are over 30% up since Bernanke started to print money.
      Whether you own stocks, bonds, CDs or other dollar denominated assets, it is not the time to diversify now.

      If congress lets the tax cuts laps on Jan 1st 2013, the dollar will rally big time.

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