Five ways the falling dollar affects you

The dollar this year fell to a 14-year low against the pound and to a 20-month low against the euro. The swelling U.S. trade deficit could continue to pressure the dollar next year, many economists expect. Here are five ways the decline may influence your portfolio, your shopping and your vacation plans:

1. It can boost returns of international stocks and bonds.

U.S.-only funds typically lag globally diversified ones if the dollar dips, says Kai Wiecking, an international mutual-fund analyst with Morningstar. So far this year, international stock funds are up more than 20 percent on average, while large-company domestic stock funds are up only 7 percent. Much of this gap is due to the declining dollar. Choose funds that don't hedge against currency fluctuations. Wiecking recommends Oakmark Global (OAKGX) and Oppenheimer Global Opportunities (OPGIX), which hold U.S. and foreign stocks, including multinationals. These companies' diversified revenues make them less susceptible to swings in one currency. He also recommends foreign bond funds, such as T. Rowe Price International Bond Fund (RPIBX).

2. It makes imported goods more expensive.

The U.S. trade deficit with China hit a high for the third-straight month in October, rising 6.1 percent to $24.4 billion. U.S. stores are stocking their shelves with imported electronics, toys and clothes. As the dollar falls, these goods become more expensive for U.S. consumers.

3. It may spoil that European vacation.

Travelers will face sticker shock upon landing in their favorite European country. One week of lodging at a 100-euro-per-night hotel now costs $112 more than it did just a year ago. Rick Steves, the author of travel guidebooks, suggests $10 picnic lunches instead of $30 restaurant outings, and using an ATM card instead of travelers checks to save on exchange fees.

4. It makes foreign currencies a more appealing option, but only for aggressive investors. Those who want the most direct way to hedge against a further decline in the dollar might consider a currency-focused exchange traded fund such as one offered by Rydex CurrencyShares. One can also buy euro-based certificates of deposit, offered by companies such as EverBank. These CDs are insured by the government, but you can still lose money if the currency weakens versus the dollar. Wiecking doesn't like these strategies for most investors. "That's more gambling then investing," he says.

5. U.S. interest rates could rise if the low dollar reduces foreign buying of Treasuries. When rates rise, bond prices fall. In addition, mortgage rates and credit-card rates go up. Currently, 30-year mortgage rates average 6.12 percent and credit-card rates, 14.79 percent.