Buck the falling dollar
One way to hedge against the sinking greenback is to buy a mutual fund that invests in foreign securities.

(FORTUNE Magazine) – In late February when South Korea's central bank said that it was planning to shift some assets out of U.S. Treasuries and into other currencies, the disclosure set off a day of panic selling in the dollar, which fell 1.5% against the euro. Such is the shaky state of the American currency. Ballooning budget and trade deficits have weighed heavily on the once-powerful greenback. Even after a 3% rally in the first two months of 2005, the dollar is down by more than half against the euro since July 2001, and by a sixth against the yen. But while U.S. investors may be losing when they travel abroad, they can profit from the exchange rate by sinking their money into the right kind of mutual fund.

The big question is whether the dollar will continue to slide. Plenty of experts think it will. "We see it falling another 20% against the euro over the next couple of years," says money manager Ron Rogé of R.W. Rogé & Co. To turn the falling dollar to your advantage, Rogé and other financial advisors recommend investing in international funds that do not hedge or use derivatives to prevent currency fluctuations from affecting the value of their holdings. Of course, that means you can end up on the losing end of currency movements if the greenback makes a strong comeback.

The most straightforward way to bet against the dollar is with a foreign bond fund. "They have the purest currency exposure," says Jeremy DeGroot, co-chief investment officer at Litman/Gregory Asset Management. And one of the purest plays in the category, according to analyst Andrew Clark of research firm Lipper, is the new, unhedged version of Pimco's Foreign Bond (PFUAX), which it introduced last April. In the fourth quarter of 2004 it returned 10%. The fund makes conservative investments in government debt primarily in developed countries. It currently has more than 95% of its assets in bonds rated AA or higher. T. Rowe Price's International Bond (RPIBX) has a similar profile but a longer track record; it has returned an average of 17% per year over the past three years.

You can also use international stock funds to bet against the dollar. Experts recommend a pair of value-oriented funds. Morningstar analyst Bill Rocco likes Third Avenue International Value (TAVIX), which has returned an average of 26% a year over the past three years by rooting out undervalued small caps from all over the globe. And Rogé likes large-cap specialist Oakmark International (OAKIX). The sibling of the well-known Oakmark and Oakmark Select funds racked up a 19% gain in 2004. That's a foreign concept worth adopting.