If you use U.S. dollars in large quantities either as an American living in the U.S., or if you are a businessman that lives outside of the U.S but pays vendors in U.S. dollars, or if you are an American expat living overseas crying buckets everyday as the dollar buys less and less of the foreign currency of the country you are living in, then this article is for you.

Don’t be fooled by U.S. Federal Reserve Chairman Bernanke’s comments in mid-2006 which fueled fears about the Feds raising interest rates. Oh this will happen, and the dollar will temporarily strengthen, but after that, say sayonara to the dollar’s strength. If you aren’t familiar with the overwhelming arguments for the dollar continuing to weaken over the next year, then perform a Google search of my article entitled “The Biggest Threat to the Global Stock Markets that You Haven’t Heard About Yet” and read it carefully. But now on to the main point of this article – How to protect yourself against a falling U.S. dollar.

If you’re a business that pays vendors/suppliers in large quantities of U.S. dollars the best strategy to protect yourself against the weakening dollar is to buy forward spot contracts that lock in today’s exchange rates for future accounts payables. Any respectable international banking institution has an F/X (foreign exchange) desk that can handle this. If you’re an individual investor, then the simplest is just to buy foreign currency. Of course you could engage in the much more lucrative active trading of foreign currency, but in this case, I hope you have time to sit in front of your computer all day. So I’m just going to discuss the simpler case of buying foreign currency and the options you have.

If you buy foreign currency from the Foreign Exchange desks of large institutions like Citigroup, often you won’t start getting really good rates unless you purchase blocks of foreign currency worth U.S. $200-250,000 or more. So if you don’t have that much to hedge against a dollar that is most likely to weaken for the remainder of the year, what can you do if you would like to take advantage of the falling dollar?

Well if you contact institutions such as Citibank, they offer foreign currency “baskets” usually containing foreign currencies from four or five different countries. For example they offer an Asian foreign currency basket, but initial minimum positions are U.S. $50,000. This is option number one. And you can also buy Euros directly from them although you won't get the more competitive exchange rates at lower purchase amounts.

So what if you don’t want to hedge $50,000 of your current portfolio with foreign currency? Then you can use Everbank. Everbank offers CDs that in essence, or similar in structure to Citigroup’s foreign currency baskets. Actually many banks do, but I'm suggesting Everbank because of the several I scoured, Everbank allows you to buy in at much smaller positions. You can buy 3, 6, 9, or 12 month CDs denominated in a single foreign currency such as the Euro, the Canadian Dollar or the British Pound. Or you can purchase foreign currency “basket” CDs. For example, Everbank’s Asian Advantage CD consists of 40% of the New Zealand dollar, 20% of the Japanese Yen, 20% of the Thai Baht, and 20% of the Singapore Dollar. And you can buy these CDs at a lower minimum investment of only U.S. $20,000.

If you’re a maverick, Everbank even offers a "Bullish on the U.S. dollar" CD, but it's not at the top of my list right now.

Also know that most times I don’t bother mentioning the exact timing of when things should be done because I assume everybody has a competent advisor that advises them on the matters I speak of in my articles. So when considering buying foreign currency as a hedge, know that the Euro is at a year high against the U.S. dollar now, so that it might be wise to wait for a small bounce in the dollar against the Euro if you are planning on using the Euro in particular as a hedge in your portfolio. Long term for the rest of the year, I think that Citigroup’s Asian foreign currency basket, (or Everbank’s Asian Advantage CD)and the Euros are both good hedges against the weakening dollar, but consult your advisor for the proper time to enter these positions. The best bet is to buy a mix of Euros and Asian currency. Happy investing.