Our Terms of Service and Privacy Policy have changed.

By continuing to use this site, you are agreeing to the new Privacy Policy and Terms of Service.

Weaker dollar, stronger returns

By Paul J. Lim, senior editor

(Money Magazine) -- The dollar has fallen for much of this decade, and lately the decline is picking up speed. Already down more than 15% against the euro since March, the buck is expected to sink another 10% by the first quarter. Usually, when a once-strong asset falls this far out of favor, the correct long-term strategy is clear: Be a contrarian and buy.

But the dollar isn't an asset -- it's a vehicle through which investments are made. And the fact that investors around the world are buying more and more non-U.S. assets suggests that the dollar will keep falling.

Paul J. Lim is a senior editor at Money Magazine. Email him at plim@moneymail.com.

There are, of course, plenty of reasons here at home that the dollar is faltering. Among them: rising deficits; low interest rates paid out by our bonds; and rising inflation fears.

But the dollar is also weaker because "investors think there are better places to put their money to work than in the U.S.," says Jack Ablin, chief investment officer for Harris Private Bank.

Indeed, the 37% drop in the dollar's value against a basket of other currencies since 2001 coincides with an unprecedented demand for the assets of other economies, especially shares of companies in fast-growing places such as China and Latin America.

A decade ago, U.S. stocks comprised 54% of the world's stock market value; today they represent only a third. As investors shift out of the U.S. market, they exchange dollars for the currencies of countries where they're doing their buying, reducing demand for the buck.

Safety isn't enough

To be sure, the dollar is still the world's "safe haven" currency, says Jeffrey Kleintop, chief market strategist for LPL Financial. The dollar's value spiked after the 9/11 terrorist attacks and again last year during the global credit freeze.

In both instances investors rushed into Treasury bonds, which required the purchase of dollars. So there will be occasions when the buck bucks its long-term trend. But that's not the same as holding back the tide.

Expand your horizons

This doesn't mean that the U.S. economy is crumbling. The strength of a nation's currency is never a pure reflection of economic might. The yen gained on the dollar this year even though Japan's economy shrank twice as fast as this country's did.

Nor does it mean you should be dumping U.S. stocks. Keep in mind that nearly half of all revenue for companies in the S&P 500 index comes from outside the U.S., up from 32% at the start of this decade. And the falling buck makes dollar-based goods look attractive to foreign buyers. A jump in U.S. exports is already starting to help, as third-quarter S&P 500 earnings are coming in ahead of analyst estimates.

But the dollar's long-term decline does argue for keeping a sizable portion of your stock portfolio -- at least 25% and up to 50% -- in foreign shares. Their value will rise simply based on the currency exchange. Meanwhile, you'll be taking advantage of the opportunities that await you overseas.

Are you stuck in a lousy 401(k) plan at work but want help maximizing your retirement savings? Send us an email at makeover@moneymail.com. For the CNNMoney.com Comment Policy, click here. To top of page

Overnight Avg Rate Latest Change Last Week
30 yr fixed3.83%3.81%
15 yr fixed2.88%2.89%
5/1 ARM3.09%2.99%
30 yr refi3.92%3.91%
15 yr refi2.97%2.99%
Rate data provided
by Bankrate.com
View rates in your area
Find personalized rates:
Index Last Change % Change
Dow 17,085.76 35.01 0.21%
Nasdaq 4,832.71 21.92 0.46%
S&P 500 2,016.07 2.64 0.13%
Treasuries 2.11 0.00 0.00%
Data as of 12:03pm ET
Company Price Change % Change
Alcoa Inc 10.48 -0.53 -4.81%
Bank of America Corp... 15.58 -0.16 -1.05%
Freeport-McMoRan Inc... 13.31 -0.15 -1.11%
Apple Inc 111.46 1.96 1.79%
General Electric Co 28.14 0.11 0.39%
Data as of 11:48am ET


Jim Chanos, the hedge fund billionaire, is bullish on America. And President Obama is a big part of the reason why. More

The National Domestic Workers Alliance introduced a new initiative, Good Work Code, to set standards and protections for on-demand workers. More

Karim Abouelnaga turned down a job on Wall Street to address a problem that set him back as a low-income student: the summer slide. More

Here are the top 10 markets where Millennials represented large shares of mortgages, according to Realtor.com More