A more immediate risk, and one pushing down the dollar over the near term, has been the advent of dollar-funded carry trades in which hedge fund traders around the world borrow at low interest rates in the United States to fund speculative expeditions in stocks, commodities and other risky assets.
This activity, and all the talk of the falling dollar, has tempted a lot more retail investors to dabble in currency trading. There are a number of online brokerages that specialize in this area if you want to try, including Forex.com and FXCM.com.
But beware: Currency trading is tough. This is hot money, and you're trading against legions of full-time, experienced pros. And currency really shouldn't be considered an asset class akin to real estate, commodities or bonds. Jeremiah Sullivan, an expert in international trade at the University of Washington, thinks it's crazy to hold currency in your portfolio as an investment: "It's like holding sand in your hand; it's so easy for it to slip out because of the volatility."
This carry trade is in fact making all markets more volatile. Because of the massive amounts of leverage used, carry traders are very sensitive to small price changes. That volatility sifts into stocks and bonds as currency traders buy and sell assets. Stock and bond traders are forced to react -- and thus behave the same way. This explains the general rise in volatility since September.
The integration of the dollar carry trade with other markets means that all assets have begun to rise and fall in lockstep with each other. In the past, commodities, U.S. stocks, foreign stocks, corporate bonds and government bonds rose and fell in response to their own separate fundamental motivations.
Off the gold standardThis is a real problem for investors. It makes it hard to diversify, splitting your assets between investments to reduce your portfolio's risk. And it will exaggerate the severity of any economic setbacks that lie ahead. When something blows, it'll blow big.
Officials in Asia and elsewhere are already warning of potential bubbles in Hong Kong real estate and Chinese stocks.
For now, the fact all risky assets are moving together is a strong temptation to shift assets out of the dollar by buying foreign stocks and bonds, snapping up commodities and selling the dollar short via a currency trading account or theexchange-traded fund.
But I wouldn't recommend betting against the dollar.
Still the standardYes, the dollar's buying power may slide further. But during the next calamity, we will be reminded of just how secure the dollar is: There will be no place to hide except real cash, and the world's investors will frantically buy dollars to unwind their risky positions.
Timing this is impossible. But broadly speaking, investors will start cutting risk when the Federal Reserve prepares to raise interest rates. Historically, this has happened, on average, six months after the unemployment rate peaks. Deutsche Bank economists expect the jobs situation to start improving by the end of this year.
Based on this, 2010 could be the year that the dollar puts an end to its long decline.