With the US dollar seeming to be in a long-term decline vis-à-vis the Euro, a question that many US investors are asking is if they should hold Euros in their savings, or as part of their overall currency diversification. And if not the Euro, perhaps some other foreign currency should make up a part of their overall portfolio?

Currencies today are not tied to any particular physical asset, but are instead backed by the guarantee and trust of the issuing government. Whenever the government runs its printing presses a bit easily, or sets a highly accommodative monetary policy (through low interest rates), the value of that currency tends to decline relative to other currencies, and relative to physical assets. US residents have witnessed a rise in housing prices as well as commodities (copper, nickel, oil), much of which has been due to the highly accommodative monetary policy run by the Federal Reserve.

As the economy picked up, and the interest rate environment stiffened, the US dollar's decline ended and it regained some of its lost value against foreign currencies, including the Euro. However, this yo-yo journey is not over yet. Each time the economy enters into troubled waters, similar policies may be expected -each time causing the dollar to lose net value against foreign currencies. This is because the US economy remains in a huge trade deficit, and the US has become a net debtor nation. These will take their toll on the currency, directly or indirectly.

There are multiple ways in which you, as a US resident, can protect yourself against this general downward drift in the value of the dollar. Firstly, you can simply open a CD or similar account at Everbank ($10,000 or more) denominated in a foreign currency such as Euro or in a basket of currencies. Secondly, you can invest in mutual funds that invest in bonds of European countries (German, Swiss, Sweden and so forth). These bonds are denominated in foreign currencies, and your interest accrues in the foreign currency as well, and gives you general protection against a downward swing in the dollar. Thirdly, invest in multi-national firms or firms that get most of their income by selling outside the US. These companies will benefit from the lower value of the dollar, and this gets reflected in their earnings, and hence on their share price.

While paying attention to Euros, also look at the Canadian and Australian dollar. The start of the recent bull market in commodities makes the currencies of these two countries particularly attractive as they are resource rich countries and the high commodity prices will underpin the economy and the currency.

Residents of Europe should similarly seek to diversify into Canadian and Australian dollars, and those from Canada and Australia should definitely seek out the Euro as a form of avoiding any devaluation tendencies within their government. Finally, all residents across the world should hold some gold and silver or at least Gold ETFs as the ultimate hedge against currency devaluations.