As many of you know, one of the most popular trades for investors in 2015 was a hedging of the U.S. dollar for international exposures—the overriding assumption being that the dollar would continue to increase following a hike in interest rates.
The reasoning behind this is that higher interest rates, coupled with an expanding economy, should attract foreign capital to the U.S., resulting in a demand for dollars relative to other currencies. Further, an imbalance of supply and demand should result in an increase in the value of the dollar, which would detract from the returns offered by international investments for a domestic investor. The simple solution, therefore, is to hedge all international exposures in an effort to avoid the translation losses from foreign currencies back to the dollar in an environment where the dollar is appreciating.
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