I agree, and have posted on this several times. We have been placed into a global economic paradigm, where currencies now matter and can fluctuate wildly, and we are now dependent, for better or for worse, on these currencies. If you have a significant allocation to bonds, and if they are all denominated in US dollars, your bonds are at high risk because they are all based on one single currency. If you hold a basket of currencies, then the risk is lowered, because the failure of any single currency will have a smaller impact.
Saying the US dollar is the world's reserve currency won't work anymore either, in my opinion, because countries are doing the same thing I am proposing, i.e., diversifying their holdings with not only US dollars, but also euros to a large extent.
Using foreign equities for foreign currency exposure won't totally work (will work for equity portion), in my opinion, because global equity markets seem to now move in lockstep with each other, and you want your bonds to provide safety and hopefully move in different directions from stocks.
Another option to consider, since there are few decent low-cost options out there, is SPDR Lehman International Treasury Bond ETF (BWX).
Dan
