COLUMN-Battling the unknowns of currency devaluation By CHICAGO Feb 8 (Reuters) - Owning a truly globalizedportfolio means investing in both developed and emergingmarkets, but figuring out the right mix gets complicated whenyou consider currency risk. In just the past few weeks, a new Japanese stimulus policythat has been easing the relative value of the yen is the latestthing upsetting global trade. More countries may soon get into the currency devaluationgame, too. The Bank of England, in trying to avert anotherrecession, may adopt U.S. Federal Reserve-style quantitativeeasing policy moves to jump-start the British economy. The poundhas already fallen some 3 percent against the dollar in 2013 inanticipation of that move, according to BMO Private Bank. It is too early to tell how currency battles will play outat a time when slow growth is forecast for most developedcountries. The United States is struggling to revive employment.Japan is trying to climb out of a slump that has lasted morethan a decade. The euro zone, mired in austerity measures, stillfaces high unemployment. If you have investments in any of these countries, throughcountry-oriented or trade-specific funds, your returns willdepend on how your funds are denominated. If your portfolio isconcentrated in U.S. dollar-earning companies, it could losesome value due to exchange rate shifts, while the yen- andpound-denominated stocks could rise in value. An example of how this plays out is the tug-of-war by theUnited States, South Korea and Japan over manufacturing. In thelast five years, foreign-owned companies have stimulatedmanufacturing growth in the United States, which has become moreattractive because of a Fed-weakened dollar and recoveringdemand. South Korea's Samsung Electronics Co isinvesting $4 billion to boost production at a semiconductorplant in Texas. Honda Motor Co LTD and Toyota MotorCorp have shifted production from Japan to the UnitedStates. Part of the reason is that the dollar has been weakeningagainst the Japanese yen and the South Korean won. Japan, for one, wants some of this back. With the arrival ofthe nation's new growth-focused government, a currencydevaluation policy might shift more manufacturing back home. According to BMO Private Bank, a new anti-deflation policyhas already resulted in a lower yen and higher Japanese stockprices. The yen has declined some 30 percent against the euro inthe last 90 days. The Japanese stock market rose 3.7 percent inlast month alone, reports S&P Capital IQ. HOW TO HEDGE One way to play foreign exchange battles is to invest in thecurrencies of strong economies. Every portfolio needs a degreeof currency diversification, and some countries can provide ahedge against falling dollar or euro valuations. Consider the CurrencyShares Australian Dollar Trust,which tracks the price of the Aussie dollar and is up 9 percentfor the three years through Jan. 30. Also consider theCurrencyShares Canadian Dollar Trust, which takes asimilar strategy and is up 2.4 percent for the period. Why Australia and Canada? Both are resource-rich and majortrading partners with China, which is a big buyer of coal,aluminum, gas, wheat and iron ore. Because they also haverelatively healthy economies with low debt, they should do wellif emerging markets continue to outpace the developed world ingrowth. Overall, though, it often makes more sense to hedge currencyfluctuation by placing a steady percentage of your portfolio inemerging markets, because currency battles are difficult tofollow. Stock markets in the largest developing countries stayed inrebound mode in January, continuing a trend that began last yearafter they had lost ground in 2011. Chinese stocks, as tracked by the iShares FTSE China 25Index fund, climbed 19 percent last year after losing 17percent in 2011. Indian stocks in the WisdomTree India Earnings Fund gained 25 percent in 2012 after losing 40 percent the previousyear. The Market Vectors Russia Fund rose 15 percentlast year, compared with a 28 percent loss in 2011. The Mexicanstock market, as measured by the IPC Index, rose 18percent last year after a nearly 4 percent dip in 2011. By comparison, Japan's Nikkei Index is up 7.3percent so far this year. While that is a healthy short-termjump, the index is still down more than 25 percent from itsfive-year high set in 2008. If North American economies keep recovering and the eurozone can eke out some growth, the emerging markets will keepbenefiting, too. STANDOUT FUNDS Several large exchange-traded funds invest in emergingmarkets, and they will give you some currency-hedging abilitybecause foreign stocks are denominated in local currencies. Three stand out: 1. The iShares MSCI Emerging Markets Index ETF holdsa sampling of stocks from Asia and South America. Its largestholding at the end of last year was Samsung Electronics, andalmost one quarter of its portfolio was in financial services.It rose 19 percent last year. 2. The WisdomTree Emerging Markets Equity Income Fund is another option, only with a focus ondividend-producing stocks. It was up 6.6 percent for the yearended Jan. 30. 3. The Vanguard FTSE Emerging Markets ETF, whichrose 19 percent last year, is similar to the iShares fund, butlinked to a slightly different index. The major differencebetween the funds is that Vanguard's annual expense ratio issignificantly lower - 0.20 percent - than iShares' 0.69 percent. When crafting a diversification strategy, do not forget thatglobalization has a dark side. If the U.S. economy shrinks dueto massive budget cuts or a slowdown, or there are more potholesin the road to European recovery, emerging markets will suffer.