Why is the U.S. dollar in such trouble?

Dark days for the dollar - MarketWatch

In May, the U.S. dollar index cracked important support. This affects all Americans, because we are all speculating in the U.S. dollar.

If you don't think so, open your wallet. Do you see dollars there? Then you're speculating on the dollar by holding on to it. Probably most of your investments are dollar-denominated as well. Another leg down in the dollar could translate into tough times for your portfolio -- and you.

Now for the good news -- there are ways to cushion yourself against the dollar's pain. I'll give you some ideas in just a bit.

First, why is the U.S. dollar in such trouble? U.S. government deficits are ballooning, and turning a deeper shade of red -- about $1.8 trillion this year alone, and up $500 billion in two months. In fact, the U.S. government is going into debt so fast that the Fed is buying Treasuries, which is like a snake eating its own tail.

The government is doing this with good intentions, to try and keep the economy from running off the rails. But our debt is increasing so fast that the U.S. may lose its Triple-A credit rating. Losing that rating would start a downward spiral of higher rates and more debt. The Treasury thinks it can just print dollars to paper over the mess; traders are showing their displeasure by sending the dollar lower.

You know who else is getting disgusted? China. According to U.S. Treasury data, from August 2008 to March 2009, China shifted more of its purchases to short-dated U.S. Treasuries from long-term agency debt. The general trend is for less buying of long-term U.S. Treasuries. It's as if China is giving Uncle Sam a vote of no confidence.

So if China is moving away from the dollar, what does it want to use instead? China has signed $95 billion in swap agreements with Argentina, Indonesia, South Korea, Hong Kong, Malaysia and Belarus in recent months. The more that countries trade in their own currencies, the less they have to rely on the U.S. dollar. Other countries besides China are making similar agreements.

Even a slow, gradual turn away from the dollar will put ever more pressure on our currency and debt. It seems the writing is on the wall for the greenback.

So where should you put your money? Here are three ideas:

One is agricultural commodity exchange-traded funds. Commodities are priced in dollars, so as the value of the dollar goes down, the value of commodities usually go up. I'll leave talking about gold, silver and oil ETFs to others - let's talk about the huge potential in agricultural commodities.

Everybody needs to eat, and people in Asia want to eat more like big, fat Americans every day. Throw in the vagaries of weather, fuel prices and disease, and you have some powerful forces in a commodity that must be constantly replaced.

And this year, the pressures on harvests could be extreme.

"The 2009 growing season has gotten off to a rough start, and farmers could face their toughest year yet," says commodity trader Kevin Kerr. He's finding that a lot of farmers are bedeviled by weather that made it tough to get crops in the ground in May.

In his 2009 Agriculture Report, Kerr added: "Statistics and research show that corn yields as well as soybeans yields may drop dramatically if crops are not planted by the middle of May."

An easy way to play this move is the PowerShares DB Agriculture Fund. /quotes/comstock/13*!dba/quotes/nls/dba (DBA 27.89, +0.13, +0.47%) It tracks an index composed of futures contracts on corn, wheat, soy beans and sugar.

Other funds let you specialize in various parts of the agriculture sector - the Dow Jones AIG Grains Total Return /quotes/comstock/13*!jjg/quotes/nls/jjg (JJG 45.67, +0.45, +1.00%) is another example. However, some agriculture funds in that same family like cotton /quotes/comstock/13*!bal/quotes/nls/bal (BAL 32.06, +1.12, +3.62%) , coffee /quotes/comstock/13*!jo/quotes/nls/jo (JO 41.38, -0.12, -0.29%) and cocoa /quotes/comstock/13*!nib/quotes/nls/nib (NIB 40.23, -0.09, -0.22%) have low volume, so be very careful.

Treasuries are another way to go. The ProShares UltraShort 20+ Year Treasury fund /quotes/comstock/13*!tbt/quotes/nls/tbt (TBT 52.64, -3.13, -5.61%) is an ETF that aims to track twice the inverse of long-dated Treasuries -- the ones from which China is shying away. Leveraged funds can move against you with brutal speed, so be careful here as well. But if you think Treasuries are cruising for a bruising, the TBT is a good way to play that move.

Finally, you can go short on the dollar. The PowerShares DB Dollar Index Bearish Fund /quotes/comstock/13*!udn/quotes/nls/udn (UDN 26.94, +0.30, +1.13%) tries to track being short the U.S. dollar versus a basket of leading currencies. This one doesn't move a lot, but it fairly consistently goes up as the dollar goes down, and vice versa.

In this wild and crazy market, there are three important things you must do: Buy on pullbacks -- don't chase anything, no matter how tempting. Use a protective stop in case this rally gives up the ghost and the bear rears its ugly head again. And use a profit target and don't be greedy -- bag those gains and get out.