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Dollar falling. Invest here.

To profit from the falling dollar, you can invest in multinational companies or mutual funds that invest abroad. But the most direct way to bet against the dollar is through currency funds.

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But don't look for currency funds in many 401(k) plans: Very few of them now exist in defined contribution retirement plans, says Micah Fannin, senior consultant with Mercer Investment Consulting Inc. in Chicago. Moreover, performances haven't been dazzling, at least among some currency mutual funds. They averaged a 0.84 percent advance in this year's first quarter, but lost a slight 0.02 percent in 2010 after losses of 1.73 percent in 2009 and 2.38 percent in 2008, according to Morningstar. By comparison, currency ETFs gained an average 2.13 percent in this year's first quarter and rose 5.46 percent in 2010 and 8.91 percent in 2009, but fell 6.64 percent in 2008.

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"The average actively managed [currency fund] has not done that well," says Nadia Papagiannis, a Morningstar analyst. "As with any other category, if you're looking for an active currency manager, you've got to make sure they are good ones. Otherwise, ETFs would provide a less costly way to invest in currencies."

Small window of opportunity

The short-term outlook for currency funds is not bright. Some analysts foresee a change in policies that affect the value of the US dollar – at least against major currencies. By late June, for instance, the Federal Reserve is widely expected to end its program of buying Treasury securities to help maintain its loose monetary policy. From there, some analysts think, the Fed might start hinting at higher US interest rates, which tends to boost the dollar.

The dollar's slide could end this summer – and US interest rates begin to rise later this year, says Joseph Trev­isani, chief market analyst for FX Solutions, a foreign-exchange broker based in Saddle River, N.J. That means currency investors may have only six months of opportunity to play the falling dollar.

Even if the dollar rallies against developed countries' currencies, it's unlikely to do so against emerging market currencies, says a spokesman for Ashmore Investment. "Economic growth in emerging markets is likely to continue outpacing that in the developed world. That will keep inflation and interest rates higher in emerging markets and support their currencies. This is a favorable scenario for our emerging markets currency fund."


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