Hedging Against a Dollar Dive

The most interesting option to me right now is the PIMCO Developing Local Markets Fund (PLMIX). This open-ended mutual fund has exposure to more than 30 foreign countries, including many emerging market currencies.

My thesis for thinking that this type of product has a place in a diversified portfolio has several catalysts:

Some large oil exporters, most notably Russia, have publicly talked about currency diversification of their petrodollars into other currencies besides the dollar.

The continued global demand growth for natural resources from countries like Australia and South Africa means that capital will flow into their currencies, possibly at the expense of the greenback.

The yield differential the U.S. currently enjoys over Europe could decrease.

The U.S. debt and deficits should cause the dollar to weaken.

All of these issues have been nagging concerns for a while. Another issue I have been thinking about lately is the investment product innovation occurring elsewhere, specifically in the U.K. The London Stock Exchange debuted a gold ETF before the U.S. and has a crude oil ETF -- the U.S. has none. Also, the LSE is winning listings from companies in hot investment destinations like Turkey's Turkiye Is Bankasi AS and Poland's Bank Pekao. The LSE will also have the OAO Rosneft IPO (Rosneft was the "winner" in the Yukos saga).

The point is that as capital markets globalize, we could see that the U.S. does not have to be the primary market. As other countries catch up economically, there will be less demand for dollars from the world investment community. This could spill over into below-average stock market returns in the U.S.

I believe that the sum of all of this is a weaker dollar in the years to come. Exposure to a currency-based product could help balance out this risk.

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