Goldman's Chambers Sees Currency Hedges Accelerate Dollar's Fall
(Bloomberg) -- The dollar is likely to extend its worst start to a year as foreign investors boost their currency hedges, according to Richard Chambers, global head of repo-trading at Goldman Sachs Group.
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'We do expect to see higher FX hedge ratios given the heightened volatility,' Chambers, who is also co-head of short macro trading at the bank, said at an event hosted by the International Swaps and Derivatives Association in New York. 'The theme of a weaker dollar, the theme of higher FX hedge ratios, the theme of future purchases of Treasuries in an FX hedge format, we think will become far more commonplace as opposed to where they were maybe 12 months ago.'
The Bloomberg Dollar Index has declined more than 8% this year, the worst start to a year on record, as President Donald Trump's erratic policies have roiled global markets and shaken investor confidence. Foreign holdings of US securities, including stocks, government debt and corporate bonds, have doubled over the past decade to $31 trillion.
So far there are few signs suggesting that overseas investors are retreating from the US bond market en masse. But Chambers said he sees diminished foreign demand ahead. That's because European investors may opt to stay in home markets as those countries boost fiscal borrowing and spending, deepening the market of the euro as the alternative reserve currency.
'You would expect to see more nationalistic investing and local investing as opposed to moving toward the dollar.' Chambers said. As the result, the US will rely more on domestic buyers to absorb the increasing debt and 'a greater dependency on increased intermediation capacity to provide leverage to the system,' he said.
Where to find potential buyers for ever increasing debt isn't just a US problem, but a global one, Alex Schiller, head of rates at Bridgewater Associates, said at the event. He pointed out that 10-year US Treasuries have the best performer among major bond markets this year.
Between 2015 and 2022, the net bond purchases by private investors in Europe, Japan, the UK and the US were almost zero as central banks absorbed the supply through quantitative easing, according to Schiller. That has changed as central banks reversed course and reduced their bond holdings, as part of the policies to combat inflation.
'The biggest change has not been in the US,' he said about the bond supply and demand. 'The biggest change has been in Japan and the biggest change has been in Europe.'
As governments around the world race to boost debt, the gold stood out as the biggest beneficiary, Schiller added.
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