The Dollar: Still the Better Hedge

BlackRock Portfolio Manager, Russ Koesterich, CFA, JD discusses his preference for the US dollar over a long Treasury hedge in the current markets.

Global stocks continue to grind higher. And it is not just stocks. A broad list of risky assets, from commodities to Bitcoin, are posting record gains. In this sense 2021 is shaping up to be remarkably similar to 2020.

But while risky assets continue to advance, assets used to hedge risk are struggling. Unlike 2020, when stocks and bonds rallied together, this year hedges have cost you. Both Treasury bonds and gold are down as investors wrestle with inflation and the prospect of less benign monetary policy. To the extent this is likely to continue, I would reiterate my preference for a long dollar rather than long Treasury hedge.

Shifting correlations

A few weeks back I discussed why gold prices have remained rangebound. While there are several explanations, one is shifting correlations between different asset classes (see Chart 1). This same framework matters in evaluating the role of Treasuries and the dollar in a portfolio.

Correlation matrix of asset returns
Daily % change correlation over 90 days – with conditional formatting applied.

Correlation matrix of asset returnsSource: BlackRock Investment Institute, as of 11/9/2021.