Dollar Decline or Dollar Collapse?

The euro could replace the dollar as an international currency. For example, Iran and Venezuela are proposing oil-trading markets denominated in euros instead of dollars.

Japan is the largest investor in dollars and, if its economy improves, it could sell off its holdings. During 2007, the Bank of Japan was increasing its prime lending rate, strengthening the yen against the dollar. However, Japan's economy has stagnated, interest rates have remained stable.

Many say the dollar won't collapse because

1. It is backed by the U.S. Government, making it the world's safe harbor currency.
2. It is the universal medium of exchange, thanks to our sophisticated financial markets.
3. All oil contracts must be in dollars.

Many in Congress want the dollar to decline because they believe it will help the U.S. economy. A weak dollar lowers the price of U.S. exports relative to foreign goods, making our products more competitive. In fact, the decline in the dollar has improved the trade deficit in 2007. (See U.S. Trade Deficit - 2007)

Although the dollar has declined dramatically over the last six years, it has not yet created a collapse. It is not in the best interest of most countries to allow this to happen, since it would decrease the value of their dollar holdings.

Regardless of the outcome, be prepared. Most experts agree that the best hedge against risk is with a well-diversified investment portfolio.

Ask your financial planner about including overseas funds. These are denominated in foreign currencies which will rise when the dollar falls. Focus on economies with strong domestic markets, such as Japan and Europe. Also ask about commodities funds, such as gold, silver and oil, which increase when the dollar declines.