The success of U.S. equities in recent months and the returns on U.S. corporate bonds have not gone unnoticed by global investors.
What has also not gone unnoticed is the risk of holding U.S. securities at a time when the dollar looks vulnerable after more than a decade of strength as Washington attempts to rebalance its trade relationship with its international partners.
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The U.S. dollar index, which has fallen by 11.07% this year, broke below its three-year trading range in August and has now broken below its 10-year average.
These crossovers are confirmation of the effect of lower U.S. short-term interest rates and the concern over the sustainability of U.S. fiscal policy and the direction of U.S. trade policy.
While global investors crave exposure to the dynamic U.S. tech sector, those investors also want to reduce that exposure to the direction the dollar.
As a result, global investors are once again hedging their purchases of U.S. equities and bonds in the options market.
They are in effect reducing their profits by purchasing insurance policies on the dollar’s direction, but safeguarding their investments should the dollar’s decline continue.
What that strategy implies is that should equity markets turn down for whatever reason, the dollar will face a simultaneous depreciation, which will create further inflation risk for U.S. importers and households.
