Falling dollar, weak dollar, eroding dollar – even casual investors have probably noticed that they are hearing these phrases a lot lately.

The U.S. dollar is down about 30 percent against the euro since early 2002, and many economists believe it could droop even further. Small investors may be wondering if any of this affects their pocketbook – it does – and more specifically how they should play the currency issue to their advantage – very carefully.

“Some people think they can predict currency swings, but it’s just like trying to guess the direction of the stock market. It is very difficult,” said Ray Mills, portfolio manager of the T. Rowe Price International Growth and Income fund in Baltimore.

Mixed blessing

A falling dollar, like falling rain, can be a mixed blessing. If the pace of the fall is slow and measured, a cheaper dollar can benefit the economy. Otherwise, a weak currency could signal an approaching economic wreck.

The first and most obvious impact of a weaker dollar is that it lowers the price of what we sell overseas (exports) and raises the price of what we buy from other countries (imports).

Say a product made in the United States costs $100 and in Japan sells for 10,000 yen. If the dollar weakens, that same $100 product can be purchased for, say 8,000 yen. It’s cheaper for the Japanese consumer.

Conversely, foreign-made products are more expensive to Americans. An American shopper eventually will pay more for grapes from Chile, for example, if the dollar continues to fall.

For investors, there are opportunities – but also pitfalls.

The United States imports considerably more than it exports, and the result is that Europe and Asia are now awash in U.S. coin.

Go big, U.S. multinationals

Whether it’s dollars or doughnuts, the price drops when there’s too much of it. That’s why the dollar has gotten weaker compared to other currencies.

“If you increase the supply of anything – in this case it’s dollars – relative to foreign currencies, that pushes down the value,” said John Lonski, chief economist at Moody’s Investors Service in New York.

That’s the basis for understanding, as an investor, possible ways to benefit from the falling dollar.

Experts say the best stock plays for a declining dollar are large, U.S. multinational companies, which sell a lot of stuff overseas.

Companies such as Internation al Business Machines Corp., General Electric Co. and Procter & Gamble Co. should benefit in two ways. First, they should be able to sell more of their products overseas because they are cheaper, Lonski said. Second, those overseas profits are worth more in U.S. dollars after they are transferred back to the United States.

“It takes a while to work through the system, but eventually we will increase our exports and decrease our imports, and that will reduce the trade deficit,” said Hugh Johnson, chief investment officer at First Albany Corp.

If large U.S. multinational companies bank bigger profits because of a weak dollar, it’s probably a good bet that the overseas based-exporters in Europe and Asia will suffer. In other words, U.S. investors might want to avoid, say, Japan-based Honda Motor Co. and Toyota Motor Corp., because their cars become more expensive in dollar terms, and Americans presumably would buy fewer of them. However, it’s not quite that clear-cut.

Ray Mills, a portfolio manager with T. Rowe Price, said foreign exporters would suffer only if they sold their products in the United States. But Honda and Toyota sell cars all over the world.

Additionally, European and Asian companies increasingly are building plants in the United States. Germany-based BMW has a plant in South Carolina.

“This lowers their costs in their currency. So when the dollar goes down, they don’t feel it as much because their costs are lower,” Mills said.

Making money standing still

For U.S. investors, the point is not to write off the entire international sector even though the dollar continues to drop. Some overseas companies might continue to do well, he said. Additionally, U.S. investors in foreign stocks receive a currency benefit when the dollar falls.

The reason: Let’s say a U.S. investor buys one share of a Japanese stock for 100 yen when the dollar is valued at 100 yen. Now if the dollar depreciates, this 100 yen might now fetch $1.15. The investor has just made 15 cents even if the stock price stayed the same.

“U.S. investors who got into European and Asian stocks in recent months have made out quite well because of the drop in the value of the dollar,” said Lonski of Moody’s.

Especially beneficial are overseas companies that pay dividends denominated in their currencies. Some of the big European and Asian banks, for example, have dividend yields of 4 percent or more, Mills said.

If the value of the dollar declines after someone buys one of these dividend-paying stocks, the payments made in euros and yen convert into an even higher yield in dollar terms.

Buying overseas stocks

“Many of the overseas banks pay nice dividends, but it’s hard to find any sector that doesn’t pay a dividend,” Mills said.

Investors who want to buy overseas stocks basically have three choices. They can purchase an American depositary receipt from almost any of the large brokerage houses. ADRs represent shares of stock in a non-U.S. corporation, and they trade over the major exchanges. The underlying stock of the foreign company might trade on the Paris exchange, for example, but the ADRs trade on the U.S. exchanges.

ADRs are denominated in dollars, but U.S. investors would still receive the currency benefit if the dollar falls.

But investing in a single stock is always risky no matter where the company is located.

A better alternative might be one of the so-called exchange-traded funds that track some of the overseas stock indexes. Barclays offers several ETFs tied to Asian markets.

A third alternative for investors who want overseas exposure is to buy shares in one of the international-focused mutual funds.

All the major mutual fund companies offer this type of fund, which is a much safer way for average investors to play the overseas markets.

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Mills said any prudent investor should have exposure to the overseas markets, no matter which direction the dollar heads. That’s because non-U.S. companies account for half the world’s market capitalization.

“It doesn’t make sense just to stick to the United States and not put any money anywhere else in the world,” he said. “Don’t play the currency swings. Experts say the dollar will continue to fall, but experts are often wrong. Invest overseas because it makes sense.”

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How it affects your wallet:

In this global economy, the value of currencies is more important than ever before. With a falling dollar:

Imported products become more expensive.

Travel overseas is more expensive.

The U.S. economy overall could be hurt.

If you’re an investor, you can benefit by buying shares of large U.S. companies whose products will attract more buyers overseas. Domestic manufacturers that compete with importers also will benefit.

U.S. investors benefit from the currency conversion by owning foreign companies (as long as their only business isn’t importing to the United States).