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Declining Dollar Forces Funds to Make Tough Choices

Some managers decide the greenback can't keep falling forever.

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Among the many concerns over the possibility the U.S. government would default on its debt was that the U.S. dollar would tumble. Or, rather, it would tumble further. The dollar already has spiraled downward against most currencies this year.

That's nothing new. The greenback often has fallen (or put another way, foreign currencies have climbed) over the past several years. At certain points, though, that process went sharply into reverse. How have fund managers responded to such currency shocks?

Many international funds never adjust their currency exposure. The managers confine their thoughts to evaluating how currency movements will affect the companies they own or are thinking of buying. But other managers do have the freedom to make direct currency moves. So, they must decide whether to "hedge" their funds' foreign-currency exposure into the dollar--and if so, which currencies to target, how much of each to hedge, and how long to leave that play in place.

Gregg Wolper has a position in the following securities mentioned above: DODFX. Find out about Morningstar’s editorial policies.