In the past two weeks, the dollar has depreciated almost 4% versus the euro. The exchange rate has risen from $1.28 per euro to $1.33 in just 9 trading days. This kind of movement is not unprecedented, but it is representative of a 5-year trend during which the dollar has lost nearly 40% of its value relative to the euro. In Nov. 2000, the exchange rate was $0.83 per euro.

There are many factors contributing to the dollar decline. The first of which is our massive trade deficit, which is now almost 6% of total US GDP. The second is our low interest rates. 30-year US Treasury bonds earn a measly 4.54%. The third is our outstanding budget promises, including an unfunded social security system, a massive war in Iraq, and a new medicare prescription drug bill that we just can’t pay for.

The only reason our dollar hasn’t plummeted already is because investors buy US Treasuries for safety, although it’s hardly safe considering the long-term devaluation trend. The dollar is widely considered to be the world’s reserve currency, but what happens if it is no longer considered so? Dollar devaluation is self-reinforcing because investor confidence can quickly deteriorate as the dollar declines.

Investors with all of their money in dollar-denominated assets need to think hard about their investment strategy. They may earn higher nominal returns, but their purchasing power is plummeting. The Dow is hitting new highs measured in dollars, but since 2000 the index has lost 35% of its value measured in euros and 50% of its value measured in gold.

It’s not a given that the dollar decline will continue, but a shift in investor sentiment can quickly transform a slow leak into a rout.