U.S. Stock Outperformance Portends More Dark Days for Dollar
The Bloomberg dollar index has plunged close to 5% this quarter and is on track for its biggest slide since 2010.
(Bloomberg) -- The dollar’s weakest quarter in a decade may get even worse as investors respond to the effects that massive American equity-market gains have had on the composition of their portfolios.
The Bloomberg Dollar Spot Index has plunged close to 5% this quarter and is on track for its biggest slide since 2010 as America’s economy shows signs of recovering from its pandemic-induced slump. That more upbeat narrative has helped to underpin a 7% rally in the S&P 500 Index that puts to shame gains in stocks from Japan to the euro area and Canada -- not to mention losses for U.K. and Australian equities.
The U.S. outperformance, though, may prompt global money managers to realign weightings of their portfolios in an effort to maintain appropriate risk levels. This process -- often carried out in the days leading up to month-, quarter- or year-end -- usually involves selling an outperforming asset and purchasing those that lag in order to get holdings back to target allocations.
In the days ahead, that could lead to funds selling dollars and buying currencies linked to underperforming share markets, such as the British pound and Australian dollar.
Hedge funds raised long positions on the Aussie to the highest since March 2018 in the week through Sept. 15, according to data aggregated from the Commodity Futures Trading Commission.
Moreover, with equity and currency volatility levels holding firm, rebalancing flows may begin to enter the market sooner rather than later as managers adjust holdings ahead of the last day of the quarter.
The Bloomberg dollar index fell 0.2% in early London trading Monday, extending last week’s 0.5% decline.
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