The Benefits of Hedging via USD

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The Benefits of Hedging via USD

Source: Unigestion, Bloomberg, as of 1 July 2021. Excess Sharpe Ratio of Fed Trade-weighted Dollar Index by Market Stress Regime

Higher-than-expected inflation could trigger a sharp upward move in bond yields and a period of market stress. One of our preferred exposures to hedge this risk is a broad long US dollar against other currencies. Here, we show how the greenback performs very strongly in periods of high market stress, as investors reduce their exposure and shift to holding safe assets denominated in US dollars. Furthermore, many investors, such as macro hedge funds and CTAs now appear to be short the dollar, creating room for a short squeeze in such a scenario.

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