The Rising US Dollar Could Be Your Portfolio’s Savior

The Rising US Dollar Could Be Your Portfolio’s Savior
Stéphane Renevier, CFA

almost 2 years ago1 min

The almighty dollar hasn’t looked this divine in quite a while: the currency has been skyrocketing against almost every other currency since the beginning of 2021, recently breaching its five-year high to trade at levels not seen since 2002.

There are two key reasons why. The first is rising US interest rates, which are making US government bonds more attractive than those of other countries. That’s incentivizing investors to put their money into the country, pushing up demand for and the price of the US dollar.

The second is the nature of the US dollar itself. See, the US dollar tends to perform well both when the global economy is recovering quickly and slowing sharply. This surprising payoff profile – known as the “dollar smile” – has been supporting the greenback since 2021, initially when the global economy was bouncing back from the pandemic, and more recently when inflationary pressures reared their ugly heads. That means the dollar is likely to remain in favor, even as other central banks embark on their own cycles of interest rate increases.

Higher interest rates are probably the biggest threat there is to your portfolio in the short term, since they could cause bonds, stocks, and even commodities to fall at the same time. So in this scenario, the best hope – and the best hedge – for your portfolio is the US dollar. You could implement a hedge either by buying contracts for difference on the currency, or by buying into the Invesco DB US Dollar Index Bullish Fund (ticker: UUP, expense ratio: 0.78%).

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