Investing During Inflation: the Shrinking Dollar

I have been a dollar bear for several years.  With deficits rising in the United States and growth stagnating relative to other parts of the world, I think the US dollar will weaken further as part of its long-term secular decline that started in 2003.  As the other investment shoe to drop with anticipated higher inflation, I think the US Dollar may be allowed to decline in response to inflationary pressures. While I have been negative on the US dollar for some time, there are challenges in finding other investments.  Another way to say this, is it’s fine to be bearish on the dollar, but what are the compelling alternatives?  To position myself for a potential next decline in the USD, I currently hold the following, with some rationale for each:

Euro exposure (FXE, European stocks): With the Euro as the most viable currency alternative for countries to shift some of their dollar reserves, I have held around 40% of my total portfolio in Euro for some time.  I don’t increase this because of weakness in the European economy and possible concerns of stability when the Euro expands to additional countries. I am interested in European bonds, but the yields on most bonds lag high dividend stocks.

Commodities and commodity currencies (FXA, FXC, GLD, SLV, and oil and metals ETFs):  When the US Dollar declines, commodity prices rise.  My preferences here are the Australian dollar and industrial commodities.  Be warned, this sector is highly volatile. Following the sharp moves due to speculation in oil markets

Emerging Market Equity Exposure: I hold about double weight exposure (relative to a global index) in emerging markets.  My primary interest is in growth companies.

Emerging Market Currencies: There’s been a recent proliferation in new instruments to gain exposure to emerging market currencies including exchange traded funds with single currency exposure to the likes of the Mexican Peso and Russian Ruble.  There are also basked funds (CEW) with exposure to a basket of multiple emerging market currencies.  I am researching these further, but don’t currently own any.

See more inflation musings in previous posts:
Investing for Inflation
The Money Illusion
Will Historic Patterns Hold
Rampant Inflation: My Big Early Retirement Worry
Real Estate

see other articles at this week’s Carnival of Personal Finance