Late last week we wrote about the risk of US corporates rushing in to buy dollars before year end. That fear proved well-founded as corporates have in fact been big dollar buyers all week.
The other big risk is that US investors, who now have a larger percentage of their portfolios invested overseas than ever before, get cold feet.
Some asset managers have discretion to hedge against currency swings. So far, that group has not been a major factor in the market. They could become so in the run-up to year-end if they fear unforeseen currency weakness will eat into returns rather than boost them as they had until early December.
If we get a sea-change in investor sentiment, the dollar could surge more dramatically than we have seen to date. We may not just see hedging but outright sales of foreign securities. Money could flow out of emerging and developed markets and back into the US, boosting the dollar across the board.
