Global Allocation Insight

The greenback makes a comeback

Jun 19, 2018

Positioning for a stronger U.S. dollar near-term.

We believe the recent appreciation of the U.S. dollar is not necessarily the result of investors seeking a safe haven as we have typically seen in the past. With the exception of emerging markets performance, which tends to weaken when the U.S. dollar strengthens, the broader markets are not showing signs of risk aversion. In fact, many of the riskier asset classes have been performing better than expected.

Instead, we think this rally in the dollar is driven by "easier" U.S. financial market conditions. Specifically, credit conditions remain benign despite the equity market volatility earlier this year, and as a result, high yield spreads remain extraordinarily low, and equity volatility has fallen over the last several weeks. In addition, while the U.S. dollar is up 4% from its February low, it’s still down versus the same time last year.

While the U.S. fiscal and current account deficits suggest a weaker dollar in the long term, fundamentals in the near-term look supportive. Considering the U.S. dollar relative to the euro, we believe conditions favor the dollar. Although U.S. growth has moderated of late, growth rates in Europe have decelerated at a much faster pace as illustrated in the chart below.

The Eurozone economy is still growing, but at a slower pace vs. the U.S. 
Purchasing managers index (PMI) levels are a key indicator of economic activity.

The Eurozone economy is still growing, but at a slower pace vs. the U.S.

Data source: Thomson Reuters Datastream, Chart by BlackRock Investment Institute.

In addition to slowing growth in Europe, rising political instability in the region is a catalyst for investors shedding exposure to the euro, which, in turn, creates more demand for the U.S. dollar. Growing fears of a populist coalition in Italy have investors beginning to question the long-term sustainability of the euro for the first time in many years. In an environment of a relatively stronger U.S. economy and a resurgence in European political risk, the dollar may, at least temporarily, resume its former role as a safe-haven currency.

In the BlackRock Global Allocation Fund, we have made some recent positioning changes to reflect our belief of a stronger dollar in the near term. Specifically, we increased the fund’s overweight exposure to the U.S. dollar, and decreased exposure to emerging market bonds and gold – asset classes known to be inversely related to the dollar.

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Russ Koesterich
Portfolio Manager, Global Allocation
Russ Koesterich, CFA, JD, Managing Director and portfolio manager, is a member of the Global Allocation team within BlackRock's Multi-Asset Strategies ...
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