The strong dollar investment puzzle

7 September 2022/No Comments
By Nick Dunbar

Investors who live outside the United States, with no tech giants listed in their domestic markets, are compelled to put their cash to work in US stocks if they want a piece of that global dominance.

As we can see from data compiled by the Federal Reserve, non-domestic holdings of U.S. stocks have increased in value by over $4 trillion since the start of the Covid pandemic, with $1.6 trillion of that increase coming from new cross-border inflows and the rest from investment returns. (This trend can be seen up to Q1 2022, the most recent data the Fed has published).

But that $12.5 trillion foreign-owned stock portfolio carries considerable currency risk. No more so when the dollar strengthens inexorably as it has done in the past 12 months, reaching a 20-year high on a trade-weighted basis. In our chart we plot the trade-weighted dollar index (DXY) alongside the Fed’s foreign equity holdings data.

The good news is that up to now, the (unhedged) return expressed in a non-US home currency will be greater than for dollar-based investors.

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