NEW YORK (CNN/Money) -
A weak dollar can produce strong returns, even for individual investors.
The euro has jumped about 6 percent against the dollar this year, as the greenback hit a series of record lows versus that young currency. The dollar has also fallen against Japan's yen. That has increased the value of U.S. companies' overseas sales while driving up the cost of imports here.
Two prime factors driving the dollar's decline: the current account deficit, a broad measure of U.S. global trade and investment, and the federal budget deficit. Experts don't expect either to narrow significantly any time soon, so the dollar could very well keep falling.
"You don't have to be a currency analyst to get your story right about the dollar," said Ashraf Laidi, chief currency analyst for MG Financial Group.
Laidi and investment professionals say there are several ways even small investors can take advantage of the dollar's weakness.
But beware: currency markets are volatile and only a small percentage of an individual investment portfolio -- probably less than 10 percent -- should be exposed to currency fluctuations, according to the experts.
Holding foreign currency
The simplest way to gain from a weakening dollar is to exchange dollars for euros, euro-denominated traveler checks or another currency of choice. The investor would then receive whatever gain that currency posts against the dollar. But there would be no other return -- the equivalent of putting your money in a foreign mattress.
For a somewhat better return, Internet bank Everbank offers certificates of deposit and money market accounts in 25 different currencies. The money market accounts can be opened with $2,500, but don't start paying interest until $10,000. The smallest CD is also $10,000.
The interest rate is lower than the rates it offers on traditional U.S. CDs but the accounts allow investors to gain from currency fluctuations. For example, a 6-month CD earns three-quarters of a percentage point annually if it's in euros, or 2.5 percent a year in dollars.
But if the euro gains another 2.1 percent or so on the dollar in coming months, then the return for the euro CD is effectively 5 percent annually, or twice the dollar CD return. But if it gains less than 1 percent or if the dollar gains on the euro, then the dollar CD would have been a better investment.
The advantage for the foreign CD is that it is FDIC insured, although it can lose value due to currency fluctuation.
Frank Trotter president of Everbank National Banking Group, said foreign currency investments by its customers have risen about 100 percent this year to nearly $1 billion.
"I think of it as part of a diversified portfolio only. We don't suggest that people speculate and day trade," he said.
Because gold is priced in dollars across the globe, it generally rises when the dollar loses value, as buyers using other currencies drive up the price.
For example since mid-May the euro has risen sharply against the dollar while the price of gold gained 20 percent. Gold is also seen as a way to protect against inflation, but experts say it's the dollar, not inflation risk, driving it up to recent 16-year highs.
Investing in gold just got somewhat easier for the individual investor.
Last month the first Exchange Traded Fund for gold started trading on the New York Stock Exchange, making it far easier for individual investors to buy into gold. The streetTRACKS Gold Trust (Research) trades under the symbol GLD. Another gold ETF is planned from Barclays Global Investors for the American Stock Exchange soon.
Overseas mutual funds
There are a number of these funds that can post gains from currency fluctuations.
Independent research firm Lipper said the Franklin-Templeton Hard Currency Fund is the best pure-play of those looking to benefit from a weaker dollar. The fund holds a basket of international currencies, with the euro being the largest. It has seen an 8.8 percent return over the 12 months ended Nov. 30, or a 6.3 percent return including sales charges.
There are many funds that invest in foreign bonds or equities. But investors looking for the best return from a weakening dollar need to be careful that the fund they've picked is not hedged against currency fluctuations. A completely hedged fund would have neither the gains nor losses associated with shifting currencies -- only the gains or losses associated with the underlying security.
Lipper suggests the Munder International Bond fund and the Federated International Bond fund for those who believe the euro will post the biggest gains against the dollar.
Making investments in foreign equity funds is a less sure way to benefit from currency movements, said Martin Vostry, a research analyst at Lipper.
"The volatility of the performance is due to underlying security performance, not currency movement," said Vostry. Overseas companies can also have their own currency hedging strategy in addition to the any hedging moves the portfolio manager uses.
One way investors can benefit from the weak dollar is to concentrate on sectors that have strong overseas sales, such as consumer goods producers, drugmakers and heavy equipment manufacturers.
Food companies such as McDonald's (Research) or soft drink makers also see a large percentage of sales overseas. Athletic equipment and apparel maker Nike (Research) now has more than half its revenue coming from sales outside the United States.
"This is how you make money without venturing abroad," said currency analyst Laidi.
The drop in the dollar can mean higher revenues as overseas sales in local currencies translate into more dollars back home or companies cut prices overseas, which also can spur sales.
For example, Procter & Gamble (Research), the nation's No. 1 consumer products maker, saw 13 percent growth in revenue in the third quarter, but said currency exchange rates accounted for a 3 percent gain, or about $122 million.
The inherent problem for these investors is the same one for investors in individual stocks -- a company-specific event can tank the stock, no matter the currency gains.
Drugmaker Merck & Co. (Research), with about 40 percent of is prescription drug revenue from overseas in the third quarter, saw a bump from changes in exchange rates. But the stock tumbled after it withdrew its key pain drug Vioxx from the market due to increased risk of heart attacks and strokes in patients who took it.
There is one mutual fund -- Fidelity's Exporter and Multinational Fund -- which focuses on U.S. companies with export exposure. It has seen about an 11 percent gain in the last seven weeks as the dollar fell. It's top holding is Dow component American International Group (Research), and four other Dow stocks -- Microsoft (Research), Home Depot (Research), Pfizer (Research), and Intel (Research).
Because it relies so heavily on blue chips, Fidelity's fund's performance is only slightly better than the 8 percent gain for the Standard & Poor's 500 index as a whole during the same seven-week period. For the year-to-date, it's up 8 percent, compared to a 7 percent rise in the S&P.
That's not surprising since about a quarter of the S&P 500 gets a significant share of revenue overseas, said Laidi.