[mkjan]

WITH HIGHER PRICES at the gas pump and the grocery store, consumers might not be looking favorably at the dollar -- one of the reasons for the recent run-up in commodities prices. But for investors, bad feelings about the dollar could dissipate if the greenback shows greater strength.

While currency investments are volatile and meant for only a small portion of an average investor's holdings, they can act as ballast for a portfolio by moving independently of stocks and bonds. With the dollar swooning, some currency investments have lately seemed to be something for only the bravest of investors. But now some investors are wondering if currencies might be in for another shift.

The Federal Reserve's decision last week to lower interest rates by a quarter- point wouldn't on its face seem likely to help the anemic dollar. That's because investors from around the world will be more likely to look for higher yields elsewhere with each rate cut the Fed makes. So places such as Europe, where interest rates are higher, draw investors away from the U.S. But last week's move might have been different because some economists have written that the Fed is likely to sit on its hands in future meetings and leave rates unchanged.

So with U.S. interest rates perhaps near a turning point, investors with currency holdings might want to re-evaluate their portfolios to see whether it's time to tweak any of their positions.

Bruce McCain, head of the investment strategy team at Key Private Bank in Cleveland, noted that the precipitous decline in the dollar could mean it's due for a rebound. He said short-term speculation has probably muscled the dollar lower than it probably deserves to go.

"Markets often go to an extreme before they reverse," he noted.

McCain also contends that economies outside the U.S. are showing signs of slowing, which could prompt central banks to trim rates in hopes of boosting economic growth.

"I think in particular we hear very little discussion of how the foreign economies are behaving. We see more signs of weakness there than it seems to me are currently being picked up by the experts here in the United States."

While a change in the direction of the dollar could occur, investors would still likely have to endure volatility.

Ryan Caldwell, co-portfolio manager of the Ivy Asset Strategy fund, contends that investors could know in a matter of weeks whether the dollar is poised for a sizable rebound. But the fund isn't taking any chances -- it has about one-third of its investments in nondollar denominated assets.

Caldwell said data on the housing market and other parts of the economy due in the coming weeks could determine whether the Fed will be able to hold off on further rate cuts.

"What we've been doing is, in a way, straddling the fence," he said of the fund's strategy. "We have a fairly marked position in equities. Those are largely focused on global growth. We have the flexibility to be really in any domestic market." He's also cautioned that the Fed may not pause in its string of rate cuts as some investors are predicting.

"If the market comes to the conclusion that the economy continues to soften and the Fed is not done, we think the dollar is going to take another hit," he said.

But if the U.S. economy shows signs it might be on the mend, the dollar could reclaim some of the ground lost in recent months.