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Dismantling U.S. Dollar

Written By Brian Hicks

Posted January 3, 2008

As far as mythical barriers go, $100 dollar oil has held out nearly as long as the sound barrier did for pilots. But as Chuck Yeager proved when he flew himself into aviation history, the speed of an aircraft was actually without limits.

Unfortunately, the same thing is true for the price of crude, since the day is fast approaching when $100-a-barrel oil won’t make anyone even so much as blink.

And no, it wasn’t just the actions of one rogue trader that made it all happen. The price of oil is high for a reason.

A big part of the move can easily be attributed to the falling dollar. While geopolitical tensions and an impossible supply scenario have driven crude higher, it’s the declining purchasing power of the dollar that made oil skyrocket recently.

But, of course, it’s not just the price of oil that’s been growing lately, not by any stretch of the imagination. We’re also talking gold, platinum, silver, wheat, soybeans–you name it, they are all going up as the dollar declines. It’s called inflation and it’s coming to a market near you.

That why now is the time when all investors should be looking at ways of growing their own portfolios as the dollar slides. Because it’s the falling U.S. dollar that may make or break your portfolio in 2008.

More Dollars = More Inflation=Higher Commodities

Here’s why. It’s simple really. So simple that even a central banker could figure it out–if he could face the truth.

Inflation is and has always been a monetary phenomenon. It’s not caused by economic growth, but by a printing press churning out dollars–a central banker’s favorite tool. It’s a simple formula whereby more money leads to not only price inflation but to a devaluation of the currency.

And in case you haven’t noticed, the printing presses have been running at full tilt for some time now. Much higher prices for practically everything have been the result.

But with the debt market crisis in full swing, the Federal Reserve isn’t about to stop even though commodity prices are screaming inflation as loud as they possibly can. Bernanke and Co. are just getting started. In fact, another series of rate cuts will likely take the Fed Funds rate back to the 3% neighborhood by year’s end.

That can only mean one thing for the dollar–further worrisome declines. It’s a scenario that could feed on itself, as the rest of the world begins to lose confidence in the greenback.

In fact, over the course of the last few months, France and China both have been among those openly questioning the rate cutting policies of the Fed and the position of the dollar as the world’s reserve currency. At times it’s been borderline hostile.

In November French President Nicolas Sarkozy warned the U.S. Congress that the U.S. risked an “economic war” if it attempts to devalue its way out of trouble by allowing the relentless slide in the dollar.

Meanwhile, just last week a Chinese finance official wrote that further cuts in U.S. interest rates would have a “harmful effect” on the dollar and the international finance system.

That, wrote Hu Xiaolian, Director of State Administration of Foreign Exchange, has prompted many investors to put the greenback under pressure.

Nonetheless, the Fed seems determined to continue to cut rates. The effect on the dollar has been profound, to say the least.

Take a look at the value of the dollar since the Fed began to cut rates in August.

dollar investment


The resulting fall in the value of the dollar has been enormous. And as a result, prices have soared. In short, it simply takes more dollars to buy the same commodity, because each of those dollars has been losing purchasing strength.

And it’s far from over.

Falling U.S. Dollar Investments

But for investors, the decline of the dollar can be played simply by buying the hard and soft commodities that will rise in value as the dollar drops. The easiest way to do this is through purchasing an exchange traded fund, or ETF for short.

Here’s look at a few that should rise as the dollar falls:

· PowerShares DB Oil (AMEX: DBO): The investment seeks to track the price and yield performance, before fees and expenses, of the Deutsche Bank Liquid Commodity Index-Optimum Yield Oil Excess Return. The index is a rules-based index composed of futures contracts on Light Sweet Crude Oil (WTI) and is intended to reflect the performance of crude oil.

· PowerShares DB Commodity Idx Trking Fund (AMEX:DBC) The index commodities are light, sweet crude oil, heating oil, aluminum, gold, corn and wheat. The index is composed of notional amounts of each of the index commodities. These are broadly in proportion to historical levels of the world’s production and supply.

· PowerShares DB Energy (AMEX:DBE): The index is a rules-based index composed of futures contracts on some of the most heavily traded energy commodities in the world–Light Sweet Crude Oil (WTI), Heating Oil, Brent Crude Oil, RBOB gasoline and Natural Gas. The index is intended to reflect the performance of the energy sector.

So when the Federal Reserve talks tough on the inflation front, take it all with a grain of salt. Defend your portfolio instead with an easy investment in commodities–a commodity-based ETF.

Many happy returns in 2008,


Steve Christ, Editor

Wealth Daily