The list of assets that have risen year-to-date is both short and odd: energy, broad commodity indexes and the dollar (see Chart 1). No surprise that energy and commodities should rally in a high inflation environment. The surge in the Dollar Index (DXY), now at a 20-year high, is less obvious.
While it may seem strange that the dollar should rally as its purchasing power plunges, the move makes more sense in the context of the Federal Reserve’s reaction to rinsing prices. Given this unprecedented shift from monetary laxity to the most aggressive tightening campaign in decades, the dollar has not only surged but also supplanted U.S. Treasuries as the most effective hedge against equity drawdowns.
Asset performance-year to date
Source: Refinitiv Datastream, chart by BlackRock Investment Institute. Sep 16, 2022
Note: The bars show the total return in local currency terms, except for currencies, gold and copper, which are spot returns. Government bonds are 10-year benchmark issues. RO-191915
I first wrote about the dollar’s role as a hedge in the summer of 2021. At the time investors were starting to adjust to a profound shift in the relationship between stocks and U.S. Treasuries, the traditional hedge for equity risk. This shift was a function of a concern investors had not faced in years: too much rather than too little growth.