Montreal, Canada

U.S. stocks might be hitting new 18-month highs this year but that's not the case for the MSCI EAFE Index or Europe, Australia and the Far East when measured in dollars. The popular major markets benchmark remains below its dollar-adjusted high even though several indexes overseas have recently surpassed their highest levels since Lehman Brothers collapsed in September 2008.

Over the past week, London, Frankfurt and Tokyo have all hit 18-month highs. In New York, most stocks have also breached their recent highs in January, triggering a bullish signal as per Dow Theory.

But if you're a dollar-based investor, foreign stocks are laggards in 2010.

The MSCI EAFE Index is down 0.5% this year. The MSCI World Index is up 2.3%.

The once high-flying MSCI Emerging Markets Index is also out of gas; stocks in Brazil are flat this year and Chinese equities have declined about 7%. India's Mumbai Sensitive Index is up just 1%. For the first time since 2002, emerging market equities are trailing developing market debt; the J.P. Morgan Emerging Markets Bond Index is up over 4% this year compared to a loss of 0.5% for emerging market stocks.

International stocks were boosted by a falling American dollar since the buck peaked in late 2001. A weak dollar resulted in big double-digit gains for overseas U.S. dollar-based investors from 2003 to 2007. But that trend has crashed since the onset of the credit crisis in August 2007.

Over the last ten years, a period marked by severe dollar weakness until recently, the MSCI World Index in dollar terms has declined 1.9% per annum versus a loss of 2.9% annually, measured in local currency.

The EAFE Index, which holds no U.S. stocks, has declined 1.1% in dollars per annum since 2000 compared to -3.8% annually, in local currency.

Basically, a falling dollar has curbed losses for international investors since 2000.

A study by legendary value investors, Tweedy, Browne Company LLC, claimed that long-term currency volatility didn't boost international stock market returns. Even with the dollar dropping hard from 1990 to 1994 and again from 2002 to 2008, global investors would not have benefited from a portfolio hedged back into deutschemarks (prior to 1999) or the EUR since 1999. The Tweedy, Browne Global Value Fund hedges its foreign currency exposure back into dollars.

Looking ahead, a period of renewed global currency volatility is imminent in the age of violent capital markets, soaring government deficits and rising long-term interest rates.

Perhaps a global index denominated in gold or crude oil might be the best anchors to preserve portfolio diversification over the next ten years. Gold has risen against most currencies since 2005 and, despite a brief lull over the last five months, is poised to reclaim that title in the absence of meaningful deficit reduction in the world's reserve currency – the U.S. dollar. Crude oil has also smashed all currencies since 2000 but has trailed gold on a total return basis.

Increasingly, the major currencies have failed to provide benchmark stability with dramatic swings since the gold window was nixed back in August 1971. We need a new currency or unit to measure index-based returns. The dollar, EUR and yen are poor bastions of wealth preservation and likely to become worse in the years ahead as central banks are compelled to expand the money supply and overshoot inflation targets.