Forget oil. Forget Fed Chief Alan Greenspan. What’s really moving the markets right now is the rise and fall of the American dollar. The world’s most important currency has been on a steady decline throughout the past three years, but recently has taken a turn for the worse. Since 2000, the U.S. dollar has fallen nearly -50% against the euro and in the past few weeks it hit its lowest level since 1995 against the world’s major currencies. The greenback is now near an all-time low against the euro, close to a five-year low against the Japanese yen and nearly half the value of the British pound.

You might wonder what the weak dollar has to do with the stock market. The answer to that question is simple, as the dollar’s value affects everything from the price of toothpaste to the pace of economic growth. Simply put, the danger of a weak dollar is that it can trigger inflation. That's because imported goods, like electronics and clothing, become more expensive when the dollar loses its value relative to foreign currencies.

Even more alarming is the impact a declining dollar can have on the financial markets. As the dollar's value falls against foreign currencies like the euro or Japanese yen, overseas investors are often inclined to dump their investments in U.S. stocks and bonds. (After all, when the dollar loses value relative to their home currency, foreign investors do not see great returns from U.S. investments.) If these foreign investors, whose huge bond holdings are propping up the dollar, were to sell their investments, the dollar would lose even more of its value. 

When making new portfolio choices in 2005, investors need to be especially wary of companies that may see their margins squeezed by high-cost imports from abroad. Importers such as Wal-Mart (WMT, $52.82) could suffer, as the cost of goods they buy from abroad might become more expensive in dollar terms, yet competitive pressures could force them to keep prices low.

The dollar’s slide is not all bad news, though. In fact, savvy investors are likely to profit from the dollar’s decline by identifying stocks that stand to benefit from a slumping greenback. With this in mind, in the January issue of our High-Yield Investing newsletter we zeroed in on leading stocks in three sectors that should gain ground from a weak dollar. All three of the following groups should benefit from a falling dollar:

-- U.S. companies that operate heavily in overseas markets
-- Firms in the tourist industry
-- Foreign companies trading on U.S. exchanges

Important Note:  To view the remainder of this article, in which Carla Pasternak provides an in-depth analysis of several specific dividend-paying stocks that should benefit from a sliding dollar,  you'll need to subscribe to our premium High-Yield Investing newsletter. After you subscribe you'll receive immediate access to the remainder of this article, as well as our semimonthly High-Yield Investing newsletter and a host of additional premium content. Please visit one of the following links to continue...

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