In the recent economic crisis, global investors fled to the safety and solidity of the U.S. dollar, pushing it up in value after a steady downward trend. As the global economy begins to strengthen, the dollar is once again losing altitude. And all signs point to yet further weakness, perhaps by a significant amount. And that’s why you need to be prepared…

A perfect storm
The dollar is being buffeted by a range of factors, led by expectations that European interest rates are bound to start rising before the U.S. Federal Reserve hikes rates. European Central Bank head, Jean-Claude Trichet, said on March 3 that interest rates may increase in April for the first time in 23 months. The euro now stands at $1.40 to the dollar, up from $1.30 in early January. The Japanese yen, Australian dollar and Swiss franc are also rising in value against the dollar.

 

In times of crisis, such as is occurring in the Middle East and North Africa, the dollar has tended to strengthen as investors take a “flight to quality.” This time around, the dollar has failed to rally. The dollar is slowly losing its safe-haven status, and speculation has begun to build that a wide number of international transactions that have historically been conducted in dollars may soon be conducted in local currencies. That means the euro, the Chinese yuan, the yen and other currencies will increasingly be used to settle trades. And as fewer dollars are required to settle trades, demand for the greenback will drop yet further.

For U.S. companies, a weaker dollar is largely positive. Exports become more attractively priced abroad in local currency terms, while foreign importers are less able to beat their U.S. rivals on price in the United States.

Three companies stand out as great plays on the sagging dollar.

1. Citigroup (NYSE: C)
As this global titan rebounds from the ashes of the financial crisis, management is looking to invest in emerging markets. As I noted in December, “Judging by recent results, Citigroup is making major inroads in some of the most dynamic regions and countries in the world.” Citigroup hopes to eventually derive half its earnings from abroad. If and when the dollar weakens further, those foreign-sourced profits will look even stronger when repatriated back into greenbacks.

Shares of Citigroup have languished in the last few months due to concerns that the company’s efforts to clean up its balance sheet are proceeding too slowly. Yet reports are circulating that a range of bidders are lining up to acquire Citigroup’s U.S. consumer-lending business — the hardest of its assets to sell. If and when such a sale is announced, look for shares to resume their upward trajectory. I still anticipate shares moving toward the $7 mark in the next year or two — more than 50% above current levels.

2. GM (NYSE: GM)
Shares of the nation’s largest auto maker have also trended down in recent weeks as rising oil prices have raised concerns that sales of highly-profitable pick-up trucks and SUVs will slow. But it’s important to remember that GM is quickly becoming a global powerhouse, building a strong presence in places like China and India, and as a result, is becoming less dependent on the U.S. market.


Moreover, a weakened dollar would bolster GM’s position at home, thanks to a large domestic manufacturing base. Rival auto makers have established more U.S. plants, but most still import the bulk of their vehicles to the U.S. market. GM, along with Ford (NYSE: F), would have the option to pursue market share gains or firmer pricing if foreign rivals are forced to raise prices.

3. Archer Daniels Midland (NYSE: ADM)
Agricultural exports have become a key bright spot for the U.S. economy as rising food consumption elsewhere has led to spot shortages of staples such as corn and wheat. Barring a global economic downturn, a booming middle class in emerging markets could help sustain that trend. If the dollar weakens yet further, U.S. agricultural exports are bound to keep rising. That would be great news for ADM, which already derives a third of revenue from foreign markets. If current trends continue, foreign sales could hit 50% of revenue within the next five years. A weaker dollar would virtually guarantee such a move.

Action to Take –> We think of these companies as American, but each one has seen foreign sales rise faster than U.S. sales and each is on its way to generating a large chunk of sales from abroad. If you’re worried about further dollar weakness, these stocks could become key components of your portfolio.