As if it isn't enough to worry about rampant inflation in Bermuda, now we are reminded - through the talking heads and print media - about how the US dollar (which our dollars floats with) is continuing to lose value against the Kingdom of England, Euroland and Japan.

It's enough to stop and make you think; it may be enough to make some investors weep. Four major world powers are stonewalling each other, using their currency as leverage, to see who will be the first to blink. And all eyes are to the East, watching China's currency manoeuvrings, wondering if or when it will be unpegged from the dollar.

This isn't the first time that the dollar was allowed to sink against other currencies, nor is the term usedlightly. The perceived US currency strategy is to bring market forces and currency values into play in order to restore a more competitive trade market, thereby benefiting the US economy weakened over the past three years by slow domestic growth, little upward movement in its foreign markets (where it sells about one third of its output) and an overvalued dollar. The strategy may help to reduce the US budget and balance of payments deficits while increasing exports overseas. An additional benefit is that US assets, including stocks, are a bargain right now, says Bill Miller - the number one large cap value manager for 12 years. And foreign investors' interest in owning them is based on seeing US stock values climb for the third year in a row in 2005.

Both the nations of Japan and China have sought to keep their competitive edge by providing cheaper goods and services to the rest of the world. Japan, by artificially and fiercely resisting the appreciation in its own currency, sells off yen and purchases US dollars. If the yen rises too much, their goods become too expensive for western consumers on both sides of the Atlantic.

China has employed a far more effective method of competitive commerce - pegging its currency to the dollar. China also holds the world's second largest hoard of foreign exchange reserves ($300 billion, despite its low per capita income of about $1,000). As the US dollar has fallen, the renminbi has been "riding the dollar down" as well as falling against virtually all other currencies along with the dollar.

As a result, China remains the world's most formidable competitor in many sectors; the decline in its currency (while still pegged to the US dollar) strengthens its competitiveness further. Many other major countries such as Korea, Singapore, Taiwan and even Japan struggle from letting their currencies rise against the dollar while many European countries (seeing high local currency valuations) are worried about decreased demand for exports which account for one-fifth of the European economy. Currency strategists feel that if the euro nears nears the 1.40 level, the European Central Bank will have to intervene and buy back Euros to keep them from appreciating even further.

The refrain lately is "what am I going to do about my investments, savings, etc. I should be converting all of my investments in sterling or euro because the US dollar keeps dropping and I am losing money".Here are some thoughts to consider before you make the mistake of chasing the pack:

1. If you've never owned sterling and euros, why would you want to own them now?

2. Why are you considering doing this now when this dollar depreciation has been in motion for many months. Are you succumbing to the infinite wisdom of hindsight being 20-20 vision?

3. Are you a currency trader? Will you know when to sell? The Euro was at 1.3284 on December 9, 2004. How high will it continue to climb before the major European economies of Germany and France, already stalling because of high unemployment and labour costs, cry Uncle? General Motors Europe announced this week that it plans to cut 12,000 jobs in Germany over the next two years.

4. If you do not cash out your investments, have you really lost any real money? No, and the next time you look, currency values may have completely reversed course.

5. How do you know the dollar decline will last? Analysts are predicting a fairly robust 2005 based on US economic data. Perhaps instead of jettisoning the dollar, you should think like a true trader and buy at the low in the anticipation of upward trends next year.

6. If you are a bettor, which country would you bet on long-term? Can an economy support unlimited appreciation in its currency? Do your research and the results may surprise you.

The secret to handling currency volatility is the same as it is for any investment, diversify out the risk as much as you can. Consider owning investments in a couple of currencies outside the local currency; the strategy there is to achieve equilibrium, regardless of currency markets swings. If you are more conservative, purchase a mutual fund that hedges its currency, or own global mutual funds where currency equilibrium may be built in.

One thing is for certain - Currency trading is a zero sum game. If you've ever watched a real-time foreign currency exchange, you will know that currency trading is frantic, subject to change by the millisecond, and never ending - almost like infinity. Who can keep up with that?

Sources: Bloomberg writers, Mark Gilbert, James Hertling and Steve Rothwell: Testimony before the US House of Representatives ; The Correction of the Dollar and Foreign Intervention in the Currency Markets, C. Fred Bergsten, Institute for International Economics.