Investors riding the weak-dollar wave could be trading today's gains for tomorrow's losses if the greenback's slide outweighs investment gains elsewhere.
Last week's Federal Reserve pledge to keep pumping money into the US economy was interpreted to mean future policies that would weaken the US currency. That in turn set off a wave of dollar selling that has been accompanied by a modest rise in stocks, new historical highs in gold and a substantial drop in Treasury yields.
Wall Street chatter increased Friday when noted hedge fund manager David Tepper told CNBC that risk assets would risein the future regardless of economic performance as long as the Fed was waiting on the sidelines to intervene.
The resulting loss in the dollarhas been greeted less than enthusiastically by those who doubt the US economy can recover without a strong currency. Investors have thus rushed to gold, sending the metal's price up 2.6 percent in the past 10 days to a new record high past the $1,300 an ounce psychological watermark.
"Gold is the best asset to see exactly what's going on as far as dollar depreciation," says Michael Pento, senior economist at Euro Pacific Capital in New York. "That's telling me quite clearly the country is losing purchasing power. Gold is setting a record high nearly every day now. That tells me (Fed Chairman Ben) Bernanke is very successful in destroying savings, destroying wealth for retirees and making the entire nation poorer."
Pento believes investors who follow the notion that all asset classes will rise because of Fed intervention are ignoring the difference between nominal and real gains. The former term refers to the actual dollar price of an asset, while the latter compares the gains realized versus their actual worth compared to the drop in value of the dollar.
Since the Sept. 21 Fed statement—considered to be a harbinger for a second round of quantitative easing, or money-printing—the Standard & Poor's 500 has gained incrementally (about 0.04 percent), while the dollar index, which measures the greenback against a basket of foreign currencies, has fallen 3.3 percent.
The dollar's plunge has fueled worries of a global trade war as weak economies race to the bottom in devaluing their currencies. The dollar, though, seems to be taking the hardest hit as belief fades that US policymakers will defend it.
"We are witnessing a full, frontal, material and joint assault upon the dollar and sadly it appears that the best the dollar can do is 'bounce' for a day or two or three before the assault shall begin anew," wrote hedge fund manager Dennis Gartman in his Gartman Letter on Wednesday.
For investors, choices lie between playing the weak dollar and hoping for adequate asset appreciation, or taking outright bets against it in the form of other currencies, hard assets like gold, or in selected stocks of companies—multinationals and miners to name two sectors—that can withstand such an environment.
"If the dollar is going down faster than the market is going up, I know I'm losing money. The gains are only nominal in nature," Pento says. "When the Fed starts their next round of quantitative easing and expansion of the balance sheet, all assets will rise but some will rise a lot less than others."
Pento says the best bets will be in commodities, "companies that pull stuff out of the ground," and various countries where central banks are defending their currencies, such as Australia and Canada.
With the fickle nature of a trading-range market, though, the dollar's move is unlikely to come in a straight line.
Among the market's favorite buzz terms now are "risk-on, risk-off" in describing the strongly uniform moves of all risk assets—either everything is going up on risk-on days, or everything is falling on risk-off days.
"This is all due to direct speculation of the Fed, with QE2 and QE lite," Cliff Draughn, president and CIO of Excelsia Investment Advisors, said in a CNBC interview. "Every time there's speculation that the Fed is increasing or doing QE2 to a large-scale measure, it's risk-on for investors and that results in a decline for the dollar."
Draughn favors multinational companies, also in Canada and Australia, as well as Brazil. He's also a gold advocate, which he says has "become a currency as opposed to an inflation hedge."
Others are being a bit more careful amid worries that the gold trade could be topping out.
"You have to be selective. What we did was add to our basic materials and industrials last month when the market was weakening and investors were worrying about a double-dip," Alan Lancz, president of Alan B. Lancz and Associates, said in the same interview.
"Now that the market has surged in September it's time for investors to get a little more defensive. So I think instead of chasing gold and commodities, I'd rather look at exiting points as it moves up. It's a little bit of a different strategy—more preservation of capital-oriented rather than chasing performance."
But what if the dollar doesn't keep moving lower?
The US currency is nearing its 2010 lows and is at a level not seen since January. The overly bearish sentiment could be setting up a dollar rally, says Christian Tharp, chief technical analyst at Adam Mesh Trading Group in New York.
"When you get into these extreme bearish or bullish situations, that tends to be ... a sign that the reversal is near," he says. "I'm expecting the dollar to stabilize here soon and probably a pretty substantial rise from here."
Tharp primarily uses ETFs to play currencies and currently favors the PowerShares Deutsche Bank Dollar Bull Fund .
But if he's wrong and the dollar continues to fall, investors could have a big headache on their hands of a different sort.
"You can buy the S&P 500. That may increase a few small percentage points. If the dollar is going to lose 10 percent of its value, you're way behind the curve," Pento says. "You have to buy something that's going to perform better than that."