There are very few times in recent memory when the U.S. dollar has actually been the world’s strongest major currency. But now, the greenback is the undisputed king of the hill.

Countries like Singapore and Japan, once considered high-priced destinations for Americans, are currently no more expensive than second-tier cities in the United States.

Same goes for Europe, now that the euro’s value has fallen by 30% against the dollar over the past two years. Canada and Mexico can also both expect an influx of American tourists.

[ad#Google Adsense 336×280-IA]Of course, investors are searching for more ways to capitalize on our currency’s strength than just foreign vacations.

And the way to profit off the dollar’s strength may just be the opposite of what you think…

The Burden of Being on Top
In the near term, there are factors in place that should keep the dollar high and possibly even send it higher.

First, the United States is the only major country that’s looking to raise interest rates.

That stance tends to strengthen the currency as foreign investors look for both yield and appreciation against their depreciating currency.

Second, the U.S. economy is growing. That attracts foreign capital, which buys dollars to invest in the country and markets.

However, the United States is notorious for working to keep the dollar low in order to capitalize on exports. After all, we like to sell things to foreigners, like laptops and real estate. A strong dollar inhibits export growth and keeps foreigners at home instead of spending money here.

It doesn’t help that companies selling goods abroad make profits in weaker foreign currencies – that then have to be converted to stronger U.S. dollars.

U.S. multinationals are already complaining and reporting weaker currency-adjusted earnings.

As that chorus gets louder, the pressure to do something about the strong dollar will build.

Pride Goeth Before a Fall
I have very little doubt that the U.S. dollar will eventually trade lower.

Barring the euro collapsing under its own weight, the buck will see a reversal of fortune. It’s inevitable.

The chart below shows the U.S. Dollar Index. It measures the dollar’s performance versus a basket of currencies over time. The major currencies in the basket are the euro and yen. As you can see, the dollar has rallied and fallen sharply before.

This roller coaster was caused, in part, because past rallies weren’t accompanied by deliberate devaluations in the other currencies in the basket. This time, quantitative easing in Japan and Europe have exaggerated the strength of the dollar.

But, as you can plainly see, the dollar has a habit of correcting – and correcting sharply – within a couple of years of setting new highs. And as you can see, the dollar is at its highest point in the past several years.

The question isn’t if the dollar will weaken, but how to take advantage of the drop when it ultimately does. You can be certain this ride will end badly for those who hold on to their dollars…

Getting Out of Dodge
As an investor, you should be looking to capitalize on the eventual decline of the U.S. dollar by using your strong dollars to buy foreign currencies so that you can benefit when the trend changes.

Bargains abound in the currency market, from the Indian rupee (ICN) to the Singapore dollar.

Even the euro and yen are attractive, and they may be more so in the coming months as we get around $0.90 per euro and 140 yen to the dollar.

When the dollar does start to weaken, it’ll do so rapidly – as investors can be expected to pile onto one side of a trade.

And the chase continues,

Karim Rahemtulla

[ad#IPM-article]

Source: Wall Street Daily