After falling for much of 2009, the dollar has been on a tear lately: It s up about 8% against a basket of major foreign currencies in the past four months. Most of those gains have come at the expense of the euro, which plunged as investors fretted about a Greek government debt default and sluggish growth in Europe. But the dollar has also edged up against other currencies because the U.S. economy (warts and all) seems to be recovering more quickly than many other developed countries, analysts say.

A hike in interest rates by the Federal Reserve later this year or in early 2011 could also give the dollar a lift. And demand could stay strong if there s another flight to safety, making Treasurys look better than the alternatives. The dollar is the best house in a bad neighborhood, says James Keegan, chief investment officer for Seix Investment Advisors, a large fixed-income manager.

Yet a rising dollar won t lift all ships. Foreign stocks are worth less when priced in dollars. And U.S. export growth could suffer as American goods become costlier abroad. For large U.S. multinational firms that enjoyed a decent tailwind when the dollar was falling, it probably means that earnings growth will be slower, says Russ Koesterich, investment strategist with asset-management firm BlackRock.

Investors can wager directly on the buck with an exchange-traded fund, but that can be risky, since currencies are so volatile. A safer option, some pros say, is to shift some money invested abroad back home. Domestic bonds and stocks are insulated from a rising greenback, says Jeffrey Kleintop, chief market strategist for LPL Financial, an investment-services firm.

Telecom giants AT&T and Verizon Communications recently sported dividends yielding more than 6%. That might not sound as good as the 8% yield on Deutsche Telekom (DT), but the payout on this German stock could be eroded by a declining euro. It s a major headwind, says Kleintop.

The dollar s strength doesn t mean investors should dump all of their foreign holdings, of course. Brazil is still an agricultural powerhouse, with a young population and a rising middle class. And Australia s currency is benefiting from strong commodity exports and rising interest rates.

Financial advisers say long-term investors should maintain exposure to foreign stocks, especially as developing economies race ahead. And there s always the risk that the dollar s run will be short-lived if fears about America s own economic problems and massive budget deficit are revived.

Still, a greenback rally could signal a welcome vote of confidence in the U.S. economy. Since the early 1970s, domestic equities have risen an average of 59% when the dollar has been in a bull market, compared with 25% during dollar bear markets, says Paul Hickey, cofounder of Bespoke Investment Group. For many investors, those odds could be worth playing.

Our Picks

Analysts say these funds and stocks could help protect your portfolio from a rising dollar.

Pimco Foreign Bond (U.S. Dollar Hedged) fund
Ticker:
Assets: $2.6 billion
Yield: 3.2%
Expenses: $93 per $10,000 invested
Manager Scott Mather hedges 80%
of the fund s foreign currency exposure and sticks with highly rated corporate and government-backed bonds. The fund gained 18.5% last year, beating 78% of
its peers, and has a good long-term record.

Tweedy Browne Global Value fund
Ticker:
Assets: $4.3 billion
Yield: 1.5%
Expenses: $140 per $10,000 invested
Foreign companies could get a lift from lower export prices to the U.S., and this fund hedges most of its exposure to the buck. Top holdings include big exporters Nestl and Diageo. The fund s 5% annualized return over the past five years beats 81% of its peers.

Enterprise GP Holdings
Ticker:
Market value: $6.6 billion
Dividend: 4.4%
The company collects fees on oil and natural gas that flow through its pipelines, and those assets gain value in a low-inflation, rising-dollar environment, says Russel Kinnel, director of fund research for Morningstar. Enterprise also generates steady cash flow and dividends.

Target
Ticker:
Market value: $40.3 billion
Dividend: 1.2%
Target operates 1,740 U.S. stores and buys the vast majority of its imported merchandise
in dollars, shielding it from currency swings. Yes, U.S. consumers have cut back on some spending, but demand has picked up for apparel and big-ticket goods, says Deutsche Bank analyst Bill Dreher.