It's not easy being green.

It has been clear for a while that the greenback is experiencing its fair share of trouble, and as a consequence, traders have built up a number of large positions against the currency.

While their moves could bring on a correction in the short term, there's still fundamental reason to believe the dollar is on a downward trajectory, or at the very least, that we're in for some bumpy currency markets .

"It's still prudent to diversify out of the dollar because none of the problems driving the dollar lower have been fixed," says James Turk, gold bull and founder of "It's no different than what central banks are doing, most recently the Bank of Italy, which said it will reduce some of its dollar reserves and buy British pounds."

One reason some foreign banks and dollar shorts believe the trend will outlive any correction is that the interest rate spread between the U.S. and the EU could diminish.

"Interest rates are a game of enticement," says Turk. If the European Central Bank raises its lending rate to 3.5% and the Federal Reserve stays at 5.25%, or even lowers the rate by 2007, it will narrow the gap between those figures. Significantly higher rates in the U.S. have made dollar-denominated assets attractive to overseas investors.

Dollar bulls say the greenback offers superior quality for investors, particularly compared to emerging-market currencies, and that this advantage will keep investors coming back to the well. But critics contend that quality is being eroded by quantity.

"There's still a lot of money floating around in terms of global liquidity," says Michael Cuggino, portfolio manager of the ( PRPFX) Permanent Portfolio , which actively hedges against a dollar decline.

"One reason the U.S. is able to fund things like its deficit is because foreign governments, who believe the system here is safe and stable, buy our bonds," says Cuggino. "But you're seeing continued money printing in the U.S., for political reasons, and we've seen this happen ever since the dollar was divorced from the gold standard in the 1970s.

"This ever-increasing supply will slowly erode the dollar's value, and the needs of politicians will keep the country printing more money," Cuggino says.

Three Ways to Play

For investors who want to move away from U.S. equities, but don't have the skills or time to buy foreign stocks, this could mean looking for a mutual fund that includes hedges against a dollar decline.

One solution is the ( PFUIX) PIMCO Foreign Bond Fund (Unhedged) , a low-risk bond play with a 5.23% year-to-date return and a 0.50% expense ratio. Morningstar does not have a five-year return for the fund, since its start date was April 2004.

The fund invests at least 80% of assets in fixed-income instruments issued outside the U.S., and may also invest up to 10% of its assets in high-risk debt.

"If you're looking for an international bond fund that will give you some protection in the dollar declines, make sure your fund actively hedges, because you don't always know," says Jeff Tjornehoj, an analyst with Lipper. "International bond funds are sometimes hedged and sometimes not, so pick something like the PIMCO fund because it explicitly states that it's a hedge."

There are also precious-metals funds, such as the ( SGGDX) First Eagle Gold Fund , that create diversity beyond equities and bonds, as well as help preserve wealth in case the greenback loses ground.

The First Eagle Fund has a 35.4% five-year average return and an expense ratio of 1.29%.

It invests primarily in companies that mine, process, deal in or hold precious metals including gold, silver, platinum and palladium, both in the U.S. and abroad. As of June 30, some of its top holdings include Newmont Mining ( NEM), Barrick Gold ( ABX) and Gold Fields ( GFI).'s Turk says that investing in precious metals is much simpler than researching and buying foreign securities, and that now that prices have come down, there are more opportunities for investors to get gold exposure.

"When prices are moving is when everyone writes about gold, and people start to buy, but investors should be buying now," Turk says. "Precious metals are down from their highs and are a good value."

But for a fund that is more diversified than a stock or commodities play, investors may want to look at Cuggino's Permanent Portfolio, which has dubbed itself "a fund for all seasons."

The fund's investment objective is to preserve and increase the purchasing-power value of its shares by investing in gold, silver, Swiss franc assets, U.S. and foreign real estate stocks and natural-resource companies. It also includes aggressive-growth stocks and dollar assets like Treasury bills and bonds.

The Permanent Portfolio has an expense ratio of 1.35% and a 13.26% five-year average return. Its top holdings, as of June 30, include cash and cash equivalents, gold coins, gold bullion, silver bullion, Treasury Bond strips and Swiss Confederate Bonds.

"We are invested in vehicles that hedge against the decline of the dollar," says Cuggino. "We believe that it's always important because we see the trend being that of long-term dollar decline."

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