Indeed, the dollar's prolonged decline has been supported by the ongoing struggles of the U.S. economy, the ever-growing levels of U.S. government debt, and the misguided "fixes" and other monetary and interest-rate maneuvers by U.S. Federal Reserve Chairman Ben Bernanke and his cohorts.
These influences won't disappear in 2012.
"The Fed will be obliged to undertake another round of quantitative easing and it will be a major source of negativity for the dollar," said Forex.com
Chief Currency Strategist Brian Dolan. "The economy has been so slow for so long, it'll force the Fed's hand."
The dollar also faces a growing challenge in its long-standing role as the world's dominant reserve currency from the Chinese yuan. China's been making strides in turning the yuan into a global currency by increasing its role in the gold market and facilitating foreign investment in its currency.
The U.S. dollar's struggles aren't new, but rather have been a trend for about a decade. You can see the dollar's path of decline with the U.S. Dollar Index, a measure of the dollar's value relative to a weighted basket of six major foreign currencies - the euro (58.6% weight), the Japanese yen (12.6%), the British pound Sterling (11.9%), the Canadian dollar (9.1%), the Swedish krona (4.2%) and the Swiss franc (3.6%).
Since 2003, the index has fallen 27% from near 110.00 to just above 80.00. It gained 2.9% in November, but erased those gains in December to break just about even in 2011.
Luckily for investors, there's a way to play both the short-term rally and the long-term fall of the U.S. dollar.
Investing in the U.S. Dollar in 2012
To play the dollar's fluctuating value this year, investors can use a Forex market contract, futures contracts on the U.S. Dollar Index or the dollar versus leading individual currencies, or one of the new dollar-based exchange traded funds (ETFs). For short-term trades, options on either the futures or the ETF shares also can be used.
Investors who opt to play the currency's near-term strength must remember to monitor the events affecting the dollar's value - a buy-and-hold approach won't work.
"Be nimble," said Money Morning
's Fitz-Gerald. "Harbor no illusions about what's happening. Capture profits as they're created by maintaining tight trailing stops, and steadily ratchet them up if the rally gains steam."
One of the leading ETF candidates for a short-term bullish dollar play is the PowerShares DB US Dollar Index Bullish (NYSE: UUP
). Actually exchange-traded notes (ETNs) rather than a traditional fund, units are issued in 200,000-share blocks by a "master trust" that seeks to replicate the performance of the Dollar Index by holding a combination of Forex contracts, futures, and options. Those shares then trade in smaller numbers, just like shares of regular stocks, and the price mirrors the percentage changes in the actual index.
That's for a short-term dollar play, but you also should plan to profit from its longer-term decline.
One of the best ways to play the long-term bearish dollar outlook is through ETF/ETN shares, like the PowerShares DB US Dollar Index Bearish (NYSEArca: UDN
). It's structured the same way as the UUP fund, but the trust holdings include short Forex and futures contracts and options, combined in a portfolio designed to move inversely to the Dollar Index itself, but by a similar percentage.
The alternate way to make a longer-term ETF play against the dollar is to buy shares in one of the growing number of ETFs linked to foreign currencies - depending on whether you believe that particular currency will benefit from the dollar's weakness.
Currencies with their own ETFs currently include the Australian dollar, British pound, Canadian dollar, Chinese yuan, euro, Indian rupee, Japanese yen, Mexican peso, New Zealand dollar, Russian ruble, South African rand, Swedish krona, and the Swiss Franc. Some currencies, like the rupee and yen, even have two funds from which to choose.
For a better idea of which currencies are poised for a strong performance this year, check out the detailed report "The Three Must-Own Currencies of 2012
" by Money Morning
Global Investing Strategist Martin Hutchinson.
A final option for bearish dollar investors would be to open a bank deposit account denominated in a foreign currency you think stands to appreciate considerably against the dollar in the years ahead. A popular choice for such accounts is Everbank (**)
, an FDIC-insured Internet bank that offers deposit accounts, money market accounts and certificates of deposit in both baskets of currencies and those of specific nations, including the euro, yen, British pound, Swiss franc, yuan, Singapore dollar and several other major currencies.