Given the large U.S. trade deficit, the tremendous debt we’ve taken on to stimulate the economy and the weak growth our economy will likely experience as we come out of the current recession, it is quite likely that over the long term the U.S. dollar will decline against other market currencies. On the other hand, many emerging markets, which are those nations whose social or business activity is in the process of rapid growth and industrialization, run trade surpluses, are less indebted to the rest of the world and are likely to grow faster than the U.S. and the rest of the developed world in the foreseeable future.

Furthermore, emerging-markets currencies offer higher yields, which attract capital flows that support their currencies. And longer term, as the balance of the global economy shifts, it may become increasingly in emerging-market countries’ self-interest to allow their currencies to appreciate versus the dollar in order to improve the purchasing power of their consumers. Taking into account all these factors, purchasing a basket of emerging-markets fixed-income securities, which have a low correlation with other asset classes provides an opportunity to reduce exposure to a rise in U.S. interest rates and also hedge against an anticipated decline in the U.S. dollar.

The biggest emerging market economies include Brazil, China, Eqypt, India, Indonesia, Mexico, Philippines, Poland, Russia, South Africa, South Korea and Turkey. Smaller emerging market economies include Peru, Chili, Morocco and the Czech Republic. While economic improvements in emerging markets has improved the credit quality of their issued debt, investing in these countries is not without risk and therefore the allocation should only represent a portion of a diversified portfolio.