The dollar is really like the common stock of the United States which is traded openly in the currency markets. It goes up or down much like the stock of a corporation, as a function of offer and demand. Its price reflects the collective perceptions of all buyers and sellers as to the future value of the country. The health of the financials certainly plays a big role but there are many other influencing factors, so we let the economists and other currency specialists make the projections.

Let us make perfectly clear that the Trend Timing system we follow deals exclusively with the broad stock market, and not currencies. Our signal does not predict the direction of the U.S. dollar. We are not qualified to judge the dollar doomsday theories. Each investor ultimately needs to decide if they believe in the long-term slide of the U.S. dollar. For those who do we can offer some suggestions about what to do to hedge against that risk.

The effects and pain factor of dollar depreciation are somewhat relative. Changes in dollar value will be much more noticeable to someone living or frequently traveling abroad than someone never leaving the U.S. Yet, over time, the erosion of dollar value against other major currencies would mean a corresponding reduction of purchasing power. If the dollar loses half of its value, all our U.S.-dollar based assets, our house and our investments essentially lose half their value. Not a good thing.

If you decide to diversify some of your non-stock market assets into dollar hedging instruments there are a few practical alternatives. The first is gold which has a very long habit of moving contrary to the dollar. Luckily you do not have to buy the real thing and bury it in your backyard anymore (although there are some who still enjoy this hobby). With the advent of gold ETFs, owning gold is as easy as buying a fund as you would any stock. Very recently, both ProFunds and Rydex have introduced mutual funds that move in opposite direction to the dollar, including one with 200% leverage (when the dollar goes down by 1%, the fund gains 2%). The key to remember here is that these investments are NOT correlated with the TimingCube signal in any way. You are on your own as far as if and when to buy them. For details on these non-correlated dollar hedges see Table 1 below.

Table 1: Dollar hedge securities uncorrelated with TimingCube signals

For the portion of the portfolio which is invested in the stock market with our Trend Timing system, there are also options to apply some dollar hedging. The trick is to invest in the stock market of countries or regions which have a stock market correlated with the U.S. (and our signal) AND a currency which you believe will gain in value against the dollar. There are a number of countries which we have been monitoring over the years which have shown good correlation, and the corresponding ETFs are listed in Table 2 below. All these funds have been much stronger then our U.S. indices so far this year as you can verify by entering the ticker of your choice in the "Performance by individual security or index" section of the "Results" page, and selecting the appropriate start date. The standouts are clearly Australia and Canada with 2005 year-to-date performance of over 30% when traded with our signal. We believe the reason for this is that these two countries both have strong "commodity currencies" and a stock market that is heavy with resource and mining companies which benefit when gold and the other metals are rising, as they most often do during dollar bear markets.

Table 2: Dollar hedge securities correlated with TimingCube signals

If you believe in the long-term devaluation of the U.S dollar you owe it to yourself and your nest egg to diversify in a dollar hedge.

Warm wishes and until next week.

The TimingCube Staff