As you learn about tapping into the wealthy world of currencies, be cautious about jumping on the short-sale U.S. dollar bandwagon.

This is a trade that is getting a little long in the tooth and, at the very least, is due for some action to shake out some of the weaker bear hands.

What's Next for the Battered Buck?

Shorting the dollar has been a great play since stocks bottomed in March. And longer term -- if we do not get our deficit spending under control -- then the U.S. dollar looks to go lower.

However, over the short term, the dollar is very sensitive to movements in the stock market. Should we get even a relatively mild pullback in the major equity indexes, then the U.S. dollar will almost certainly rally as hot money looks for a safe and secure place to park itself.

A Diversified Dollar Play

One of the most widely watched and traded benchmarks of U.S. dollar strength/weakness is the U.S. Dollar Index (Symbol: DXY).

This index tracks the value of the U.S. dollar against a basket of six major currencies. Those currencies are the Euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc.

The index was created in 1973 with a base value of $100. So, the U.S. Dollar Index having a current value of 76 tells us that dollar has declined 24% against the basket of currencies in the U.S. Dollar Index.

Futures traders use the DXY as a way to either get long or short the dollar. Because the DXY is priced against a basket of currencies instead of just one currency, it's a more-diversified way of playing movements in the U.S. dollar.

Here's how that works:

• When traders short the DXY, they are in effect selling U.S. dollars and going long the six currencies in the index.
   
• When traders buy the DXY, they are effectively shorting the six currencies in the index and buying the U.S. dollar.

A More-Targeted Way to Play

Traders who are looking for a more-targeted way to trade the dollar will trade "currency pairs."

A currency pair gives you the ability to go long or short the dollar against a specific currency -- i.e., short the dollar, long the Euro ... or long the dollar, short the Japanese yen, etc.

Pairs-trading is important because not all currencies will decline or appreciate against the dollar evenly.