If I think the exchange rate of the dollar to something else is decreasing then I sell dollars and buy the something else.
Buy Gold. Period. The factors dollar bears cite are prevalent in EVERY OTHER currency. The risk in my estimation isn't dollar isolated collapse but COORDINATED devaluation by the G-20 (someday G-70, lol). Select stocks will be fine also. Hence the relative strength of KO. A can of Coca-Cola will still cost something regardless if it's an Amero a Chavez/Obama bolivar-dollar or a nugget of gold. Stock certificates could just as easily be "currency." I'll swap you 1 YHOO for a steak burrito with extra guacomole.....
A rare instance that I agree with Makloda, if your worried about the dollar, use the dollar index as your hedging mechanism. I prefer using put options over outright selling the futures however. As stated in some posts above, there are also risks in other currencies at the moment and the dollar could continue a rally for some time. The puts would actually protect you while keeping you from potential margin calls on futures if it continues to rally, and you can buy additional puts in the future, allowing you to capture better prices (higher).
If you buy a 'basket' of foreign currencies - maybe 6 or more, for example - does this make sense as a 'hedging strategy?'
so nice to see that someone gets it! totally agree with this. can't tell you how many arguments I've had with ETers about China not needing the US. these folk read too much press. They don't seem to get your third bullet point. Others need US trade to purchase from China, not to mention that they could never make up the diff anyway. This is precisely why China will continue to buy US bonds no matter how crappy they get. Can't afford to let the buck drop too far. Anyway, good post. Good points all around.
Concur with pabst about Au. Other industrial metals might be a hedge, but so illiquid that who knows how you would get out of them. I haven't grasped this sufficiently to comment . I'm somewhat partial to holding unhedged foreign government bonds. Look what happened to US treasuries lately. If there was a reversal, wouldn't capital return to the safety of their own domestic economy? Not sure if your bank would survive? Put some in domestic govvies (gilts, bunds, whatever). Interesting post on this topic today (obliquely) from a blogger who writes occasionally on nouriel roubini's website. You can access it here: http://londonbanker.blogspot.com/
Another point lots of people forget when it comes to the dollar: its status as the world's de-facto reference currency, and the fact that it explicitly ISN'T tied to anything like gold, so the Fed can print as much as it likes. In real terms, for the United States, this is LITERALLY tantamount to having a gold standard AND the ability to transmute lead into gold. Now... if the Fed abuses that ability TOO badly, the Dollar will start falling out of favor. But IMHO, the Fed would have to be unfathomably abusive about it, because every other currency is a distant second. From a business perspective, the Euro is FAR worse... anything the US might do to debase the dollar is likely to be mild and delayed compared to what the EU will have almost certainly done to the Euro LONG before that point. There's another problem with gold... it isn't NEARLY as scarce as it used to be. 500 years ago, gold mining was largely restricted to low-hanging fruit and mostly pure veins. Today, the only real limiting factor to the amount of "new" gold entering the marketplace is commercial demand for it. 500 years ago, only relatively pure gold could be readily mined. Today, we can take gold-containing ores and extract it via chemical or electrolytic processes. The only real limit is whether the resources it takes exceed the value of the gold produced. If gold truly became THAT valuable compared to Dollars, you can bet that we'd see the direct equivalent of gold-based "inflation" within a matter of years, as commercial mining and ore-processing ramped up to satisfy the demand. It's the same reason why diamonds are such a horrible investment... their scarcity was the result of a cartel (deBeers), not physical rarity... and there are now diamond mines beyond the reach and authority of deBeers, as well as processes to create synthetic diamonds that can't even be reliably identified as such by master diamond traders in the Netherlands. Ten years from now, the "DeBeers Certificate of Authenticity" and laser-etched microscopic serial number on the diamond itself will be the only way left for them to try and keep "their" diamonds more expensive.