4 Ways to Short the U.S. Dollar

For decades, the U.S. dollar has been among the mightiest currencies in the world. Now, the question on some investors’ minds is how low will the dollar go?

On Friday, Oct. 9, the dollar Index, which tracks the U.S. dollar against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, touched 75.9, its lowest level since August 2008.

During the past year, the dollar has been subjected to formidable forces, and one of the most influential has been global economic momentum. Many countries that hold large reserves of U.S. currency – China is sitting on more than $2 trillion – are watching nervously as the nation’s debt continues to rise and its deficits with trading partners in Asia and the Middle East continue to grow, says Clyde Prestowitz, the president of the Economic Strategy Institute, a think tank in Washington, D.C., that advocates for responsible globalization and describes itself as nonpartisan.

In addition, the government stimulus package makes it unlikely that an already weak monetary policy intended to support U.S. exports will be reversed in the near term. The government’s decisions to print more dollars and increase government spending suggest the currency will continue to weaken.

In short, many signs point to the dollar’s decline. “I think the dollar is going to go down in the medium term, in three to five years,” says David Wyss, the chief economist at Standard & Poors. “Countries are diversifying away from the dollar reserves. China and the OPEC countries will be moving toward more evenly-weighted market baskets, which means they’ll be buying fewer dollars.”

As of Oct. 9, one dollar would convert to 67 euro cents, down from 73 euro cents a year ago. U.S. travelers certainly feel the pinch – one euro cost $1.47 as of Friday, up from $1.36 a year ago. In Japan, one dollar would convert to 88.4 yen, down from 100.5 yen a year ago.

Last week, more bad news leaked about the dollar. An article in The Independent said that China, Russia, Japan, France and Arab states in the Persian Gulf are planning to end dollar dealings for oil and move to a basket of currencies. Oil and finance officials in the Gulf later denied that report.

In any case, finding the next best alternative to the dollar will prove difficult, Prestowitz says. “The dollar market is by far the biggest and the most liquid and it’s the easiest one to get in and out,” he says. Also, should a global panic or war occur, expect the dollar to rise in value. “Whenever there is panic, people flee to the U.S. and the dollar strengthens,” Prestowitz says.

For now, investors who want to short the dollar have a few options. Analysts recommend buying up commodities – primarily gold and oil – as well as currencies of countries that produce commodities, and foreign stocks that are exposed to companies that aren’t holding much U.S. currency. In most cases, the best options are investing through mutual funds or exchange-traded funds.

Here are four ways to short the dollar:

Expect most commodities to perform well against a declining U.S. dollar. In contrast to the dollar, which as a piece of paper is valuable only because the U.S. government says it is, commodities are typically solid things of inherent value. Historically, most currencies were backed by some sort of commodity.

Although pricey, gold is still the purest indicator of monetary impact and it’s far less volatile than most other commodities, says Axel Merk, the founder of Merk Investments. Two out of three of Merk's funds are bearish on the dollar. Although, gold hit a new record of $1,059.60 last week, it’s very likely to continue rising in the near term, he says. Silver, platinum and palladium also tend to rise when the dollar falls in value, but they’re subject to wilder swings; silver can move 10% in a day, he says.

“These are hedges against the weaker dollar but they have different dynamics,” says Merk. “You have to know their volatility. It feels good when they go up, but your stomach can turn upside down when they go down.”

Currently, some of the best-performing commodity-based ETFs include SPDR Gold Shares (GLD), which is up 18.8% year to date, as of Oct. 9, according to Morningstar. Also the iShares Dow Jones US Oil & Gas Exploration & Production Index Fund (IEO) is up 38.6% year to date. The firms within this fund are small oil and gas companies that have low-cost fields, are finding new fields and extracting more marginal gas and oil, and have leverage exposure to energy prices, says Bradley Kay, an ETF analyst at Morningstar.

Most commodity-based ETFs aren’t built to go against the U.S. dollar, but on a historical basis, they tend to rise as the dollars drops in value, says Nicholas Brooks, the head of research and investment strategy at ETF Securities, an asset management firm that’s based in London and issues ETFs.

Some mutual funds now show an inverse relationship to the U.S. dollar. Vanguard Precious Metals and Mining (VGPMX) is up 65% year to date and is primarily exposed to gold, platinum, palladium and steel and only 7% of its assets are in U.S. companies, says Harry Milling, a mutual fund analyst at Morningstar. (Last year, this fund was down 56%.) Also, Van Eck International Investors Gold (INIVX), which is composed of gold mining companies, is up 58.4% year to date. However, it isn’t highly diversified; the fund invests mainly in companies with potential for production growth, Milling says.