Investors may consider emerging market currency investing as a possible tool to protect themselves from U.S. dollar devaluation. There are several ways to do this:
1. Buy bonds denominated in an emerging markets currency such as Brazilian, Chinese, Malaysian, Thai, etc. This is very hard for retail investors to do, especially in a cost-effective way, so this should be done by buying no-load open-end mutual funds that do this. If the economy crashes in an emerging markets country they could impose exchange controls and your money would be trapped inside the country.
2. Open a bank account denominated in an emerging markets currency such as Brazilian, Chinese, Malaysian, Thai, etc. In some cases a U.S. based bank may offer this service. If you invest overseas the local government may not insure your bank account. If the economy crashes in an emerging markets country their government could impose exchange controls and your money would be trapped inside the country.
3. Use derivatives contracts such as commodity futures or OTC swap contracts, or currency options. These may involve tricky problems like backwardation, contango, ruinous lock-loss-limit moves, counter party default risk. They may be opaque, hard to understand and are designed for wholesale professional investors, not retail investors. They are highly leveraged and this could cause huge losses. These are not appropriate for retail investors. However, there are mutual funds open to retail investors that use these instruments in a non-leveraged way.
4. Buy stocks, real estate, REIT's that are located in an emerging market country. You will have less liquidity, greater bid-ask spread costs, less investor protection and more legislation against foreign investors compared to investing in a developed country. There is the risk of foreign exchange controls trapping your asset inside the EM country during a crisis.
Regarding the subject of foreign currency investing, some experts claim it is an unexploited frontier because some of the players do not use investment techniques to make a trading decision, but instead trade regardless of market conditions simply because they need to buy foreign currency to facilitate a foreign trip or an import purchase. However, if a foreign currency is too expensive people will intuitively import less from a particular country or take less trips there, so I doubt that theory. Instead, assume that the forex market is full of very smart, alert, aggressive professional players, so a retail investor should assume that forex investing is risky. Further because is it is very hard to forecast forex price movements that increases the risk to investors. Instead of calling forex an investment, it should be called a speculation, since there is no reasonable way to forecast future price movements. The difficulty lies in that ultimately a government may decide in the middle of the night to make a sudden devaluation or upvaluation that is irrational from an economist viewpoint but which is needed from a viewpoint of political expediency.
A chart of the U.S. dollar compared to the other developed countries shows that except for a brief time in the 1980's when U.S. rates were artificially high, which made the dollar artificially high, the dollar has fluctuated in a range bound manner that has not changed that much compared to other developed countries. Emerging (developing) countries do not want the dollar to be devalued; instead they try to peg their currency to the dollar to gain an export advantage. It seems laughable to try to diversify out of the dollar because other countries are also busy trying to devalue with Quantitative Easing. However, it is still a good, prudent idea to diversify out of the dollar because you never know if the U.S. would succeed in devaluing. However, trying to speculative with leveraged trades in foreign currency is very risky. Instead consider making a long term investment in a mutual fund that seeks to hold foreign currency denominated bonds with high credit quality, and which are not "hedged" with futures contracts back into dollar denominated values. In examining mutual funds that do this, using a Morningstar screen, it is interesting to note how many times the forex denominated bond funds turned out to be a mediocre performer. So in considering the idea of a forex investment, please be very, very careful.
There is unified common theme here: when an asset class is perceived as a haven from inflation, etc. then people overpay for it, thus ruining the asset. A similar story occurred with precious metals, TIP's (Inflation indexed Treasuries), real estate, stocks. Essentially a bubble was formed by the actions of investors who were panicking about a new bubble! Please get professional investment advice to avoid overpaying for alleged inflation hedges.
This is my independent investment advice about emerging market currency investing.