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Foreign Exchange

US dollar may get boost as index investors re hedge equity losses, Citi Says

The dollar may gain at the end of the month as investors who hedged in other currencies reduce those positions because of losses from assets such as US stocks, Citigroup says in a report.

Citifx analysts Kristjan Kasikov and Pierre Noual say that positive returns from government bonds were offset by sharp losses in equity portfolios during the month. Therefore index-based investors will reduce their FX hedge notionals to adjust for the reduced value of those portfolios.

"Our model estimates that unwinding the USD hedges will outweigh other flows'' Kasikov and Noual say.

As a result of the sharp overall losses in June, the signal is quite strong for all currencies and stronger for the Japanese Yen, the British Pound and the Norwegian Krone, as expected volume of hedge rebalancing flows is above historical norms, they say.

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