Ways to Weather a Weaker Dollar

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Exchange-traded funds, or ETFs, might be another savvy, low-cost option for investors seeking broad international exposure. S&P's Young suggests allocating 15% of the equity portion of a portfolio to developed foreign markets, represented by the iShares MSCI EAFE index (EFA) ETF, along with a 15% weighting in iShares MSCI Emerging Markets (EEM) (see BusinessWeek.com, 11/17/06, "World Won't Sniffle If U.S. Sneezes").

Whatever the dollar's direction, some foreign exposure can be a smart addition to an investor's portfolio. By adding foreign bonds funds, "a well-diversified portfolio will not only gain from multiple currencies but add diversification," says Scott Leonard, president of Redondo Beach (Calif.) financial planning firm Leonard Wealth Management.

3. Foreign Bonds

Along with overseas stocks, foreign bonds would also get a boost from a falling greenback, financial planners say. "The most direct beneficiary of the weakening dollar are bonds denominated in foreign currencies, most commonly the euro and the yen," says Louis Kokernak, a certified financial planner with Austin (Tex.)-based Haven Financial.

Kokernak uses institutional shares of Pimco Foreign Bond (Unhedged) (PFUIX), which invests in government-issued overseas bonds. The fund posted a 5.76% return this year through Oct. 31. T. Rowe Price International Bond (RPIBX) also provides foreign currency exposure and has a three-star Morningstar rating.

It's important to keep in mind that not all currencies move in the same way vs. the dollar. Investments pegged to various foreign currencies will probably have varying results. "Each economy can react quite differently to a rise or fall in the greenback," says Anthony Ogorek, operating manager of Williamsville (N.Y.)-based financial planning firm Ogorek Wealth Management. "As investors will certainly discover, nothing is as simple as it appears."

4. Energy

Energy-based commodities, like crude oil, could get their own boost from the dollar's drop, some analysts say. That could be particularly true if the greenback's decline were to accelerate from a gradual dip into a full-fledged panic. "If we had a severe crash, interest rates and inflation would take off," says Jeffrey Bogue, principal at Wells (Me.) financial planning firm Bogue Asset Management. "Commodities would do well with heightened inflation," he says.

As the underlying commodities rise, companies in the energy sector are also poised to gain from the greenback's woes, adds Shigeko Makino, global investment manager at Putnam Investments and manager of the Putnam Global Equity Fund (PEQUX). Specifically, Makino likes Houston-based oil companies Grant Prideco (GRP) and Marathon Oil (MRO).

5. Basic Materials

Metals from copper and zinc to silver and gold might also see their prices rise as the dollar drops, analysts say (see BusinessWeek.com, 11/28/06, "Time to Hop on the Gold Wagon?"). Don Martin, owner and founder of Los Altos (Calif.)-based Mayflower Capital recommends investing in base and precious metals—and the companies that make them—along with foreign securities, oil, and natural gas.

Putnam's Makino favors Canadian mining company Teck Comincko (TCK), which produces copper, nickel, and zinc. "They're about 8 to 9 times earnings, copper is only marginally off its all-time highs, and the supply-demand situation looks very positive," Makino says.

Whether or not the greenback's decline persists, savvy investors can find plenty of ways to hedge against currency risk. The key is to maintain a globally well-diversified portfolio, experts say. Though the dollar may be falling, the sky is not.

Hogan is a reporter for BusinessWeek.com in New York.