The econoblogosphere is blowing the bugles to announce the central bank stampede away from the dollar. Clusterstock, The Big Picture and The Economic Populist are all referencing the Bloomberg article which states that only one-third of the new cash invested by central banks in the last quarter went into dollars, compared to two-thirds in 1999. Despite this rout, central banks hold 62% of their reserves in dollars, making it still the world's premier reserve currency.
As discussed in the U.S. Economy Forum, the dollar will continue to decline until the U.S. economy recovers enough to allow the Fed to raise interest rates, supporting the dollar's value.
What It Means to You
The dollar's decline has driven some of the Dow's rise to 9,885. However, all of the Dow increase since March is not due to the dollar decline. A lot of it is due to just plain ole investor relief that the Stimulus Package prevented a global economic collapse. Confidence has been restored, but only somewhat. Therefore, the Dow will not continue to rise at its current rate, regardless of what the dollar does.
What is the best protection against a dollar decline? A well-diversified portfolio with a healthy proportion of international stocks and bonds. For more specific ideas, see Readers Respond: How to Protect Your Investments Against the Dollar Decline
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