They used to say, “You can always depend on the US dollar.” But faith in that long-standing ­truism has been eroding sharply—especially this year—in ways that could affect you as an investor and a consumer. Worldwide concern over the safety and strength of the dollar heightened this year as Congress went to the brink ­before coming up with a last-minute budget deal to raise the federal debt ceiling and avoid a default. The dollar came under further pressure as Standard & Poor’s downgraded the US credit rating and the Federal Reserve said that it intended to keep short-term interest rates near zero through mid-2013.

To help you understand the implications of a diminished dollar and how to protect yourself—and even profit—Bottom Line/Personal spoke with one of the country’s leading currency experts, economist Martin D. Weiss, PhD…

WHY ITS VALUE IS SLIDING

Central banks around the world have amassed vast reserves of the dollar over many decades because of its role as the dominant currency backed by the most powerful nation. But after a steady ­decline in its value in relation to other major currencies over the past decade, the outlook for the almighty greenback has grown more precarious. The value of the dollar has dropped by 9% in the past year (as of August 15) and 38% since 2002 against the US dollar index, comprised of a basket of six major foreign currencies. Investors have rushed into super-strong currencies—especially the Swiss franc, which has traded at record levels against the US dollar, up 33% over the past year. And they have bet on gold, whose price topped $1,800 per ounce in August.

The US dollar will almost surely continue to decline against most major currencies in the future.

Reason: The long-term strength of a nation’s currency depends on its economic growth potential and fiscal health. Despite the deal to try to slow the growth of the enormous federal debt, the US balance sheet is in much worse shape than that of many other countries. Even in the best-case ­scenario, US economic growth is likely to be sluggish for many years to come.

Economists expect our gross domestic product (GDP), a key benchmark of the nation’s total economic output, to grow by less than 3% in the second half of 2011…and even that may be vastly overstated, since another recession may be under way.

At the same time, extremely low interest rates in the US, which reflect, in part, anemic economic growth and the Federal Reserve’s efforts to bolster the economy, have made the dollar less attractive as investors seek higher rates in other countries, many of which have pushed up rates to combat inflation. Even China, which is the largest foreign holder of US Treasuries, has been diversifying away from the US and buying other nations’ debt as well as gold. If the rest of the world continues to seek such alternatives, the dollar could weaken much faster than in the past decade. That’s a scary scenario considering that most of us have all or most of our investments and savings wrapped up in dollars.

WHAT IT MEANS TO CONSUMERS

The same forces driving the dollar’s slide have a ripple effect on how much your money buys. The weaker the dollar, the more expensive the imported goods we buy, including cars and electronics. One effect of a weaker dollar is higher prices at the gas pump and on heating-oil deliveries, because crude oil trading is conducted in dollars, although fears that a new recession will lower demand for oil pushed crude prices down in early August.

HOW TO PROTECT YOURSELF

Many investors already have some protection because they invest in asset classes that tend to move in the opposite direction of the dollar. That includes gold…foreign stocks denominated in foreign currencies (although some foreign stock funds hedge against fluctuations in currency values)…and stocks of big US multinational companies with significant foreign sales. But the value of these assets can fluctuate due to many other factors besides how strong or weak the dollar is. For that reason, the most effective hedge for small investors is simply diversifying their portfolios to include investments in the currencies of other major countries. Here’s how…

For moderately conservative investors…

Put at least 5% of your portfolio in a diversified basket of currencies. To avoid making the bulk of this investment when the values of those currencies might be at peak levels, phase in purchases over several months because currency movements can be volatile and unpredictable. My favorite exchange-traded fund (ETF) for a basket of currencies…

PowerShares DB US Dollar Index Bearish (UDN), an ETF that tracks an index designed to replicate the dollar’s performance against other major currencies, including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. The weaker the dollar gets, the more this ETF returns. Note: The euro is likely to be among the weakest of these foreign currencies, but the overall index should continue to rise in value.

For more aggressive investors…

Invest another 5% to 10% of your portfolio, in addition to your investment in the currency basket, in specific individual currencies of countries that are likely to strengthen against the dollar in the next few years. That could include the Swiss franc and, at the right time, commodity-rich countries that have sound banking systems. The easiest way to do this is through ETFs that invest in foreign interest-generating banknotes. That way you get returns on your cash plus the accumulated change of the currency against the dollar. My favorite country-specific ETFs…

CurrencyShares Australian Dollar Trust (FXA) provides direct exposure to the Australian dollar’s movements against the US dollar. Over the past year, the Australian dollar gained 7.5% and is near a 30-year high. It is the fifth most actively traded currency in foreign exchanges today. This ETF has returned an average of 9.5% annually over the past three years thanks to Australia’s robust economy, wealth of natural resources and fiscal conservativeness.

WisdomTree Dreyfus Brazilian Real ETF (BZF) offers exposure to the value of Brazil’s currency, the real, in relation to the US dollar. Like Australia, Brazil is a commodity-rich nation that has been among the world’s most aggressive in getting its fiscal policy in order. The Brazilian real has outperformed almost every other currency over the past three years. This ETF has returned an ­annualized 8.3% over that period.