Why The World Started Hedging Its US Dollar Exposure
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
This Odd Lots podcast episode features a deep dive into the unusual currency dynamics of 2024 with Hyun Song Shin, Economic Adviser at the Bank for International Settlements. The discussion centers on the unexpected dollar weakness despite strong US corporate performance, particularly focusing on April's "Liberation Day" when stocks, bonds, and the dollar all fell simultaneously. (06:03) Shin reveals that what appeared to be a "sell America" trade was actually institutional investors scrambling to hedge their unhedged dollar exposures after years of avoiding costly currency hedges due to high short-term interest rates.
• Main Theme: The episode explores the paradox of dollar weakness amid strong US equity markets, revealing how institutional hedging behavior rather than outright selling drove much of the currency volatility in 2024.Speakers
Tracy Alloway
Tracy Alloway is co-host of Bloomberg's Odd Lots podcast and a senior reporter covering markets and economics. She brings extensive experience analyzing global financial markets and has established herself as a leading voice in financial journalism through her insightful coverage of complex economic phenomena.
Joe Wiesenthal
Joe Wiesenthal is co-host of Bloomberg's Odd Lots podcast and executive editor at Bloomberg. He's known for his sharp market commentary and ability to translate complex financial concepts into accessible insights for both professional and retail audiences.
Hyun Song Shin
Hyun Song Shin serves as Economic Adviser and Head of the Monetary and Economic Department at the Bank for International Settlements (BIS). He's a recurring guest on financial podcasts and is recognized globally for his expertise in international finance, monetary policy, and global capital flows, making him one of the most authoritative voices on currency markets and financial stability.
Key Takeaways
Currency Risk vs. Maturity Risk Trade-offs
Institutional investors face a fundamental choice between bearing currency risk or maturity risk when investing globally. (27:57) As Shin explains, when investors hedge their dollar exposures using short-term FX swaps while holding long-term securities, they eliminate currency risk but create a dangerous maturity mismatch. During stress periods like the 2008 Global Financial Crisis or March 2020, investors found themselves scrambling for dollars to roll over these short-term hedges, even though they were holding long-term assets that couldn't be easily liquidated at fair prices.
The Ex-Post Hedging Phenomenon
When market conditions change rapidly, investors who were previously comfortable with unhedged exposures suddenly scramble to protect themselves after the fact. (10:41) This "ex-post hedging" behavior was central to April's market turmoil, where institutional investors who had avoided costly hedges during high interest rate periods suddenly needed protection as dollar weakness accelerated. The evidence for this includes massive increases in both spot FX transactions and outright forwards, while actual portfolio flows showed minimal selling of US assets.
Network Effects Preserve Dollar Dominance
The global financial system's reliance on the US dollar creates powerful network effects that make wholesale shifts away extremely difficult. (18:39) Despite concerns about dollar weakness, the BIS triennial survey showed the dollar's role actually increased to 90% of all FX transactions, up from previous periods. This demonstrates that when everyone else operates within the dollar ecosystem, it remains in individual actors' interest to participate, creating a self-reinforcing cycle that preserves the currency's international status even during periods of weakness.
Gold as Risk Asset Rather Than Safe Haven
Gold's behavior in 2024 has fundamentally shifted from its traditional safe-haven role to acting more like a speculative risk asset. (39:48) Rather than rallying during stress periods as historically expected, gold has been moving in correlation with risky assets like Bitcoin. This change reflects increased central bank accumulation and speculative interest rather than traditional inflation hedging or flight-to-safety dynamics, suggesting investors should reconsider gold's role in portfolio construction.
Emerging Markets Benefit from Multiple Tailwinds
The combination of better policy fundamentals and global financial conditions has created a powerful backdrop for emerging market performance. (34:05) Improved monetary policy in many emerging economies, combined with dollar weakness providing a natural tailwind, has supported both local currency appreciation and credit growth. The weaker dollar particularly benefits complex supply chain-dependent industries like semiconductors, as it reduces tail risk for currency-mismatched borrowers and encourages expanded credit provision.
Statistics & Facts
- The BIS triennial FX survey recorded $9.6 trillion in daily FX flows, representing nearly 30% growth from the 2022 survey. (12:08) This massive increase was significantly influenced by the April market turmoil and provides unprecedented data on stress-period FX market behavior.
- The US dollar maintains 90% participation in all FX transactions according to the latest BIS survey, even higher than previous periods despite concerns about dollar weakness. (12:29) This statistic demonstrates the continued dominance of the dollar in global finance even during a year of significant currency volatility.
- Travel advisors have become the fifth fastest growing profession on LinkedIn over the past three years, with a 50% increase in people describing themselves as travel agents or advisors. (29:58) Travel booked through advisors is expected to reach $141.3 billion next year in the US, representing 26% of the total market.
