Source: Unigestion, Bloomberg. USD appreciation in March 2020.
Outside of traditional beta hedges such as equity downside or long volatility trades, the USD offers excellent diversification properties in a portfolio. High beta emerging market currencies and commodity currencies tend to depreciate more extensively against the USD during episodes of stress. As a recent example, during last year’s pandemic the USD appreciated sharply. During the month of March 2020 alone, the USD index (DXY) rallied over 8%. We believe that holding a long USD bias to hedge equity beta is both attractive and diversifying and can at times be cheaper than paying expensive option premia / skew and time decay.
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