US Dollar: Exposure normalizes as real rates fall – BNY
BNY’s Geoff Yu highlights that international investors are aggressively cutting Dollar exposure as real-yield support erodes following the July FOMC meeting. The bank sees the Dollar decline as a normalization of previously extreme U.S. asset holdings rather than a collapse in U.S. exceptionalism.
BNY’s Geoff Yu explains that international investors are reducing their exposure to the US Dollar as real yields decline following the July FOMC meeting. The bank views the Dollar's drop as a return to normal levels of U.S. asset holdings, rather than a decline in U.S. exceptionalism. FX risks vary depending on the currency pair, with U.S. equities still supported and fixed income more insulated from the decline.
Overall U.S. exposure among international investors, using a 40:60 equity/fixed-income portfolio minus dollar holdings, has hit record highs. Since the July FOMC meeting, the shift away from "dollar exceptionalism" has been swift. If the adjustment is symmetrical, total dollar exposure could return to flat within about 12 weeks, potentially signaling a major change in FX markets in the fourth quarter.
While the Dollar faces pressure, the risks vary by currency pair and asset class. The decline in U.S. equities' exceptionalism is offset by stronger home bias in fixed income, which means the impact of hedging overseas should be smaller, especially for shorter maturities. Unless there are significant changes in fiscal or monetary policy, the trend toward a normalization of international exposure to U.S. assets is expected to continue.
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