Todd Sohn
Technical Strategist

Investors Agnostic Towards Rising U.S. Dollar

One of the more important macro developments throughout the last year has been the ongoing strength of the U.S. Dollar. The U.S. Dollar index (DXY) – which is heavily weighted towards the Euro, British Pound, and Japanese Yen is up roughly 16% since May 2021, and is now sitting at nearly 20-year highs. Its impact is widespread for both companies (hedging FX exposure) as well as portfolios (skewing towards or away USD sensitive areas).  

What’s most surprising to us though, is the agnostic attitude investors are showing towards this development.  Flows to hedged equity ETFs are largely flat, without so much a sign of interest at countering FX risk that can eat into returns. During the last major DXY spike in 2014, hedged equity flows surged to $31 Bn over a short 3-month timeframe, as market participants sought to protect gains for their international equities. 

The hedging effect is perhaps best represented by Japanese equities today. Using three primary U.S. listed Japan ETFs - iShares MSCI Japan ETF (EWJ), iShares Currency Hedged MSCI Japan ETF (HEWJ), and WisdomTree Japan Hedged Equity ETF (DXJ) – we can see the huge performance spread in the chart below. The U.S. Dollar has appreciated against the Japanese Yen by roughly 17% over the last year (going from 109 to 128), and as a result, hedged Japan ETFs have exhibited flat to positive performance (HEWJ, DXJ), while the unhedged EWJ fund has meaningfully deteriorated. This underscores how the FX markets comes into play for ETF selection and paying close attention to macro developments occurring across markets.



Published on May 17th, 2022. The information is current only as of the date of this communication and we do not undertake to update or revise such information following such date. This communication is provided for informational purposes only and is not an offer, recommendation, or solicitation to buy or sell any security.  This is not a complete analysis of every material fact regarding any company, industry, or security. Additional analysis would be required to make an investment decision. This communication is not based on the investment objectives, strategies, goals, financial circumstances, needs or risk tolerance of any particular client and is not presented as suitable to any other particular client. Past performance does not guarantee future results. All investments carry some level of risk, including loss of principal.