King dollar is back. For the last decade, the dollar has generally been inversely correlated to the S&P 500. When markets were up, the dollar was down versus most other currencies. Higher markets were associated with lower volatility and greater risk appetite – the “Risk On” trade. Investors would short dollars and buy higher yielding currencies like the Australian Dollar, Brazilian Real and Norwegian Krone. On a risk-adjusted basis, these carry trades had an attractive Sharpe ratio and were the lifeblood of too many hedge fund managers (collecting 2/20 on carry is almost criminal, but that’s another story).
It’s good to be the king, while it lasts… Read more