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During periods of “low visibility,” confusion reigns: for every indication of one trend, there seems to be a countertrend. The key is to glean from the collective wisdom of reliable leading indicators a clear signal that the economy is headed for a turn.

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Backed Into a Currency Corner?


THE dollar has seemed to be on a one-way trip -down - against other major currencies. The tumble has helped the portfolios of some fortunate Americans by bolstering the returns of their foreign stocks and bonds.

But if the dollar's fall continues, as some analysts are predicting, many American investors may be hurt. That is because foreigners' appetite for United States stocks and bonds could weaken, dampening returns in American markets.

Investors can use a variety of techniques to hedge their portfolios against a further decline in the dollar. Most experts warn, though, that trying to predict the direction of currencies is risky, particularly after one of them, like the dollar, has already taken a sharp dive.

Understanding markets in the United States is difficult enough, they say; investing in foreign markets and trading on currencies is more than some investors can reasonably manage. Because of the risks, many advisers recommend that only a small percentage of portfolio assets be used for currency hedges...

Still, there are some simple steps that Americans can take if they think that the dollar will keep falling. One of the most basic, if you are planning a trip to Europe or Japan, is to buy euros or yen now and put the money away until you travel. You won't earn any interest on it, but if the dollar drops further before your trip, you will have paid less for the money you need...

Investors with a higher tolerance for risk may want to consider gold or gold stocks...

Gold prices have already risen more than 9 percent this year, to around $455 an ounce, though that is still far below its peak of $850, set early in 1980...

Investors can also choose precious-metals mutual funds, which may invest in a variety of mining stocks and commodities other than gold. They have returned more than 35 percent a year, on average, over the last three years, but are down almost 2 percent this year, according to Morningstar...

This year, currency movements have had a significant impact on the performance of many international bond funds. Consider T. Rowe Price International Bond, a fund that invests in high-grade bonds but is not hedged against currency shifts. It is up 9.3 percent so far this year, while the Pimco Foreign Bond fund that is hedged against currency movements is up 5.4 percent. Most strikingly, the T. Rowe Price fund was up only 4.28 percent at the end of October, which gives an indication of its volatility...

And while bond funds that do not hedge currencies have lately had stronger returns than those that do, they will also suffer if the dollar rises.

BEHIND all of these investment strategies is a belief that the downward trend in the dollar's value may not be over. That view is held by Lakshman Achuthan, managing director of the Economic Cycle Research Institute. The decline of the dollar "is shaping up as one of the bigger stories of 2005," he said.

"The trade deficit means that there are more and more dollars abroad, and foreign investors need to do something with them," he said. "As long as they are putting them into Treasuries, they are saying they believe in the value of the dollar. If they start to get a little nervous, they may consider other alternatives."

And if foreign investors become skittish about their dollar holdings, investors in the United States may be grateful for any measures they have taken to protect their portfolios from a dollar decline.