US stock outperformance portends more dark days for the dollar

Bloomberg September 21 | Updated on September 21, 2020 Published on September 21, 2020

In the days ahead, realigning weightings could see investors sell dollars and buy currencies linked to underperforming share markets

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 index has plunged close to 5 per cent 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 per cent 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 UK and Australian equities.

The US outperformance, though, may prompt global portfolio managers to realign weightings of their holdings 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.

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In the days ahead, that could lead to investors selling dollars and buying currencies linked to underperforming share markets, such as the British pound and Australian dollar.

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.

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Published on September 21, 2020
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