There’s still a debate as to exactly when (but not if) it will happen: The weakening dollar and rising inflation that have historically followed stimulus efforts.

There’s also a question as to what set of circumstances would cause foreign US Treasury holders to dump the greenback due to dissatisfaction with the volatility in what today is considered the world’s reserve currency.

Some have argued there will be a sudden collapse in the dollar in response to some tipping point, event or economic shock that would drive investors to other currencies to escape further losses. However, in this event, it would be too little too late for investors to preserve value, as assets (currencies and commodities) around the world would skyrocket in price, and US Treasuries’ interest rates would spike as demand for Treasuries fell.

Yet others disagree there will be some sort of apocalyptic decline in the dollar. Rather, these opponents argue the process will be a continued, slow decay, because not all the conditions for a collapse exist. For a collapse, they argue, there must be an underlying weakness. Second, there must be a viable currency alternative. Third, a tipping point event would need to occur.

But we believe both sides of this debate have been too narrow in what would be necessary for a dollar collapse to occur—and there is already evidence of the currency’s overall decline.

The dollar has dropped by 18 percent to 20 percent against various currencies between 2003 and 2013—currencies that could hold their value against the dollar according to various foreign exchange funds that have been designed to preserve value (see chart).

Currencies Expected to Hold Their Value Against a Future US Dollar Decline

Of course, the decline has not been surprising, given that the last 10 years has been a period during which US debt nearly tripled from around $5.9 trillion to $16.7 trillion. These high debt levels increase the chances the US would let the dollar’s value slide even further in the future, when an explicit devaluation may be undertaken to allow the country to repay debt with much cheaper money.

That’s why recent forecasts that the US dollar will strengthen as the Fed’s stimulus is tapered—as interest rates rise—seem incomprehensible. Given the Fed’s accommodative policy, the central bank appears quite comfortable with letting inflation exceed 2 percent if unemployment remains above 7 percent.

Moreover, many dollar bulls that focus on tapering of quantitative easing (QE) seem to forget that the Fed’s “accommodative monetary policy” means more than just stimulus, such as keeping rates low. According to one analyst recently quoted in Forbes, reacting to the Fed’s announced 2 percent inflation target in early 2012:

“An increase of 2 percent a year over a period of 20 years will lead to a 50 percent increase in the price level. It will take 150 (2032) dollars to purchase the same basket of goods 100 (2012) dollars can buy today. What will be called the ‘dollar’ in 2032 will be worth one-third less (100/150) than what we call a dollar today.”

Many have argued that top holders of US debt—such as China and Japan—would never dump dollars given that would make their products more expensive in the US, an economy these countries are still very dependent on (foreign countries own $5 trillion in US debt).

However, as the US may be forced to devalue more heavily to meet its obligations, US citizens and corporations and other foreign countries fearing wealth destruction might not be held back by overseas trade considerations.

The fact that there is no viable alternative or equivalent world reserve currency on an equivalent volumetric basis presently does not mean there are no other currencies that can serve as a preserver of wealth.

Like the game of musical chairs, the real issue is that those that are first to find alternative currencies will likely crowd out those that wait until the last moment when the music stops. And that’s when the US wakes up to an inflationary nightmare.

The lack of an alternative world currency will only create winners and losers. And one cannot know the future—whether higher debt burdens from a US war with Syria, or unexpected recession or other economic shock leads to an unexpected sell-off and triggers the greenback’s swift collapse.

What we do know is there is enough evidence of existing value erosion to warrant immediate action to protect wealth.

Inflation-Protection Actions Now

The potential for value destruction as a result of inflation due to QE in the US hasn’t been lost on the world’s fund managers.

PIMCO, a global investment management firm, earlier this year launched the PIMCO Foreign Currency Strategy ETF (NYSE: FORX) created to offer investors the potential to benefit from fundamental changes in global currency dynamics by diversifying away from the dollar.

FORX is a portfolio of currencies and local currency bonds actively managed to help investors diversify out of the dollar and preserve their purchasing power. The active management is a notable difference for an exchange-traded fund (ETF) marketplace made up mostly of passive products in which investors generally must form their own views on individual currencies or currency indexes.

“The ongoing transition away from the dollar as the preeminent global reserve currency is continuing and many competing currencies increasingly offer better yields and long-term credit dynamics,” says Scott Mather, PIMCO’s managing director and head of global portfolio management.

Mather, at the time of the fund’s launch, said, “foreign exchange is a purer way to gain foreign currency exposure and also avoid the unwanted exposures that can come with holding indirect currency plays such as equities or commodities.” PIMCO Foreign Currency Strategy ETF is a buy up to 55.

In selecting currencies in its top holdings such as those of Canada, Sweden and Norway, PIMCO appears focused on avoiding countries that have undertaken significant QE programs. The fund also contains some co-called “commodity currencies,” such as those of Mexico and Russia, achieving a nice mix between diversified economies with solid economic fundamentals and those strong economies that are highly dependent on commodity price increases.

Commodities typically follow an inverse relationship with the value of the dollar. When the dollar strengthens against other major currencies, the prices of commodities typically drop. When the value of the dollar weakens against other major currencies, the prices of commodities generally move higher. There are many reasons why the value of the dollar has an impact on commodity prices.

The main one is that commodities are priced in dollars. When the value of the dollar drops, it will take more dollars to buy commodities. Commodity currencies are valuable because on many occasion they have had a forecasting ability on impending commodity price rises. However, with greater participation by investors in commodity indexes, this relationship has weakened somewhat, according to a recent research report by the Bank of Japan.

For greater exposure to “commodity currencies,” the WisdomTree Emerging Currency Fund (NYSE: CEW) is laser-focused on them. The fund’s top holdings include the Mexican peso, Brazilian real, Chilean peso, and Colombian peso. In 2012, five of the top ten performing currency ETFs were WisdomTree funds; the firm’s currency ETF was #4. WisdomTree Emerging Currency Fund is a buy up to 27.

Finally, although the Deutsche Bank index creators of the Powershares DB G10 Currency Harvest Fund (NYSE: DBV) insist that their Bloomberg top-rated currency ETF is not necessarily a hedge against a weakening US dollar (they’re neutral on the currency), they do indicate that the fund would do exceptionally well in a rising commodity price environment, because they are long the Aussie dollar. Powershares DB G10 Currency Harvest Fund is a buy up to 30.

Moreover, the Inflation Survival Letter advocates a diversified strategy that balances both currency and commodity exposure. In our Survive Portfolio, the GreenHaven Continuous Commodity Index (NYSE: GCC) is an ETF that aims to track the Equal Weight Continuous Commodity Total Return Index (CCI-TR) which provides exposure to diversified commodities, up 1 percent in the last month. GreenHaven Continuous Commodity Index is a buy up to 32.

And although we believe there are better long-term inflation hedges than gold (please see ISL, Gold’s Tarnished Reputation, August 20 issue) the metal is a good insurance policy against a short-term crisis.

In August, we added Goldcorp (NYSE: GG) to our Thrive Portfolio. As per our last report, given gold’s sharp decline over the past year, Goldcorp is definitely a contrarian bet. But one of the best ways to hedge against inflation is to buy high quality businesses when they are cheap, which occurs when they are out of favor. And Goldcorp is definitely out of favor. In the last month, GCC declined 8.39 percent. Goldcorp is a buy up to 39.