US dollar continues to benefit investors

The US dollar is expected to continue to benefit investors, especially in these uncertain times, as fluctuating asset prices and exchange rates are forcing investors to make sure their portfolios are well-diversified and can to shore-up the defensive areas of their portfolios, according to ETF Securities.

At the same time, many investors viewed cash as simply a defensive and static portion of their portfolios and cash holdings were typically used for liquidity and downside protection, with Australian investors mostly using the Australian dollar.

“The US dollar has traditionally been viewed as a safe-haven asset, with most global central banks keeping it as a reserve currency and many international transactions conducted in the US dollar. The value of the US dollar tends to be less volatile, particularly compared to emerging markets, backed by what is to the most part seen as political and economic stability,” ETF Securities’ chief executive, Kris Walesby, said.

According to him, most Australian investors held at least 70%–80% of their assets in Australian dollar, adding exposure to currency fluctuation and helping to diversify an Australian portfolio.

However, the diversification benefit should come from the fact that the US$/AU$ exchange rate correlated negatively with the US stockmarket (as represented by the S&P 500), meaning that the US dollar tended to appreciate against the Australian dollar when the US stockmarket was falling, and vice-versa.

“In other words, the Aussie currency tends to perform well when markets are rising, which is linked to demand for Australia’s resources-heavy exports,” Walesby said.

Holding a currency other than the Australian dollar could also buffer the cash allocation in periods where the Australian dollar was weak, given the importance of the US$/AU$ exchange rate, “the greenback makes sense as the obvious – and easiest – currency to use in this way,” according to ETF Securities’ chief executive.

“At any time, taking an ‘enhanced’ approach to the US dollar can bring many benefits to a portfolio – and in uncertain and volatile markets like the present, those benefits can be magnified.”