Beyond the Greenback

Yet over time, the erosion of dollar value against other major currencies would mean a corresponding reduction of purchasing power.

If the dollar loses half of its value, all our U.S. dollar-based assets -- for example, our homes and our investments -- essentially depreciate by half. That's not a good thing.

Over the last 35 years or so, the dollar has lost about 70% of its value compared to major foreign currencies, such as the Swiss franc.

The dollar did take a breather from its long-term downward trend and showed substantial gains in the period between 1995 and 2001.

But since 2001, the decline has resumed.

In the past year, our unprecedented triple deficit (the U.S. trade deficit, the federal budget deficit and the personal savings deficit) has accelerated the dollar's fall.

On May 1, the greenback hit a one-year low against the euro and seven-month low against the yen.

The Solution

We've always believed currency hedging is a good element of any portfolio, but not the traditional form of hedging involving trading in foreign currencies.

In the slightly different paradigm of trend-following, currency hedging is achieved by investing in international stock markets.

Why is that? Currency is really like the common stock of a country, which is traded openly in the currency markets.

It goes up or down, much like the stock of a corporation, as a function of offer and demand. Its price reflects the collective perceptions of all buyers and sellers as to the future value of the country.

So when you invest in a foreign stock market by purchasing, for instance, shares of a country index fund, you are buying into the basket of companies represented by that index and their prospect for future revenue and earnings growth, all valued in that country's currency.