Consider the Currency Markets in 2009

My window is that the dollar is going to stay weak through the first quarter and that we might begin to see some bottoming in the dollar into the second quarter. More likely than not, by the second half of the year, the dollar should begin strengthening again.

So, should investors bet against the dollar through the first quarter?

BD: Yes, but I would keep a close eye on what's happening with the fiscal stimulus and U.S. economic data, and if signs of improvement become apparent, then you should begin to switch and anticipate a stronger recovery in the dollar.

What else can investors accomplish through currency trading?

BD: You can always use the currency markets to hedge currency risk. For example, if you own $45,000 of various European shares, you might decide you want to protect against downside movement in the euro. What you would do is, since you are already long in the euro by virtue of your stock holdings, you would sell a portion of your European stock position - you might decide you want to hedge 20% of your risk or 50% of your risk by buying options in the dollar - that's a decision the individual investor has to make.

If the euro depreciated against the dollar, your hedge would profit, so you would be short Euros in your hedge account. The euro would go down and you would make a profit (from your options) that would offset some of the equity loss. And if the euro were to strengthen, your hedge would limit your upside from further Euro strength, but the gains you would be making from the underlying equity position would offset the losses on the hedge.