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The rising concern about the United States dollar's value has become impossible to miss. Gold has risen above $1,000 an ounce; investors desperate for energy exposure have kept natural gas in steep contango all year; and every other day we seem to get a call or an e-mail asking about foreign currency funds. [Read this article for an explanation of contango.]

We understand the fretting. Various emergency measures over the past year pumped enormous quantities of dollars into the United States financial system, and they're more likely to cause inflation now that we no longer have panicked investors worldwide clamouring for the safe harbour of the dollar. Chinese central bank officials dropped hints for much of the past year that they would like to diversify away from US Treasury bonds, and recent large investments in commodities and mines show they might be serious this time. Even the new Japanese Minister of Finance made comments that implied Japan may no longer suppress its currency against the dollar to support exporters. Without the artificial support of the major East Asian currencies, we couldn't say how far the dollar might fall.

This news looks worrying, but we are not giving up on the greenback yet. The Federal Reserve has managed to shrink overall money supply through most of 2009 by withdrawing some of the financial supports and pulling back freshly minted dollars that merely sat in banks' vaults to ward off panic. No matter what Chinese officials say, with $2 trillion and counting in reserves, they simply have to keep buying Treasury bonds. There's no other market big enough to meet their incredible investment needs without severely distorting prices. Chinese imports of copper and other industrial commodities have already fallen as prices soared in the past few months. As for the Japanese Minister, he has already tried to take back his comments, saying instead that he was merely content with current exchange rates.

We believe that the dollar will likely depreciate over the next decade relative to other currencies, as the euro and major emerging currencies replace some of the massive US Treasury bond reserves held by central banks worldwide. However, we feel that the depreciation is likely to be fairly mild and could take years to finalise. Investing in the fall of the dollar could easily be a volatile bet that pays off too little, too late. In fact, after its recent tear downward, we would not be surprised if the buck bounces back slightly in the near term as stock markets cool down their remarkable rise.

This is an excerpt of Bradley Kay's The Dollar-Proof Portfolio article, published on Morningstar.com. Bradley Kay is a Morningstar ETF analyst.

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