INVESTING: Concerns about weakness of U.S. dollar overblown

The sky-or, rather, the U.S. dollar-is falling. You’ve been hearing about the inevitable demise of the U.S. dollar for years. It recently fell to an 18-month low against the euro. The yen and other major Asian currencies are gaining ground. Headlines are screaming inflation is going to skyrocket, and interest rates will have to head higher. Is this the end of your retirement plan? How are you going to profit from this? We have the answers, right here.

First, currency speculation is not for the feint of heart. The great Warren Buffett lost almost $1 billion betting against the U.S. dollar last year.

So many sophisticated people and companies are focusing on this one issue that it boggles the mind. But the idea of a weakening dollar makes sense. We are accumulating too much debt (although so is every other currency, save Australia). Asia is growing, and over time so will its currencies. I’m not one who believes that the dollar falling a little portends all these other disasters.

Currency fluctuations have both positive and negative implications that can balance each other out over time. The U.S. dollar falls, and the stuff we sell to the Japanese gets cheaper for them. People who complain about imports from China get a little solace. Chinese goods will get more expensive for American consumers. Let’s hope the discipline of the free markets will cause our political leaders to rein in the spending.

The bottom line: I don’t think a lower dollar today keeps you working as a greeter at Wal-Mart until you’re 90. But a new trend has been established in the dollar, and for the time being it is down.

The mutual fund company Rydex offers some great exchange-traded funds that allow us to invest in the currencies of other countries. There are seven of these ETFs. They cover the euro and a few other European currencies, along with Australia (I own this one) the Canadian dollar and the Mexican peso.

If the dollar drops in value against the currency of one of these countries, the ETF of that country goes up. The Australian dollar ETF, FXA, is up 0.87 percent this month against the U.S. dollar. In addition to the currency appreciation, you get the moneymarket rate earned on the currency, which in the case of FXA is 0.43 percent per month. You would have made 1.3 percent owning this ETF for the month of November. That’s far better than the market, which is flat so far this month.

These foreign currency ETFs will continue to rise if the U.S. dollar keeps falling. I think the dollar will fall a little more over the next few months, but I would caution anyone who thinks a rout is coming.

At least for the early part of 2007, U.S. equities-and large-cap growth stocks in particular-should keep attracting investor interest. Foreigners are going to want into the rally, and to do that they have to own dollars. This demand will create a cushion for the slide, keeping things from getting out of control.

So how will this affect inflation? Rates could go back up a little, but I don’t see a reversal of the bigger trend, which is down.