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A Strong-Dollar Policy for Investors

Editor's Note: The following is an excerpt available exclusively at from a story originally published by Investment U.

After four years of getting pushed around by the euro, the dollar has been strengthening in 2005. In fact, it's hovering close to the two-year highs made last month. And most likely it is not over.

But how can you invest in or trade that belief? How does the average trader or investor buy and sell dollars? Let's look at the most common and accessible ways to invest in the dollar, and which instruments might be the most useful for your account.

Whether you think the dollar will go up or down, if you want to trade or invest in it, you have to have something to buy or sell. You could always run down to a bank or an international airport and exchange all your euros for dollars, or vice versa. But as anyone who has traveled to a foreign country knows, the transaction fees charged by banks or currency exchange kiosks are huge! So let's look at some more practical alternatives, ranging from the futures and forEx markets to several available mutual funds.

The Futures Market

You can trade the dollar through the Chicago Mercantile Exchange's (CME - Get Report) currency futures contracts. Currently, the CME offers contracts in about 16 currencies vs. the dollar, and one generalized dollar index that tracks the dollar compared to a weighted basket of seven other currencies. To trade these contracts, you have to open an account with a futures broker. Here are some pros and cons to futures trading:

Advantages: Well regulated, sufficient liquidity, highly leveraged, low transaction costs.

Disadvantages: High leverage brings greater risk, you have to keep up with expiring contracts.

Bottom Line: Leverage makes this an instrument for seasoned and disciplined traders and investors; however, for those who have the experience and skill, this is the way to get the best bang for your trading dollar.
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