Holding dollars makes sense short-term

One asset class deeply out of favor right now is the US dollar, although many investors still have huge holdings. But in the short-term this is probably the asset class to watch.

It is not just that the UK pound at $1.60 and euro at $1.40 look too high for the economic outlook. It is more a question of taking a view on what a stock market correction is going to do to the dollar.

Setting aside the debate on the durability of the stock market rally, does it not make sense to hold the asset class most likely to benefit from a reversal of this long rally, at least as a short-term hedge?

Hedging stocks

For if stocks come down then the dollar will go up. It is pretty automatic as the liquidation of equities means turning them into cash which increases demand for the dollar and sends its value up. And although ArabianMoney has no liking for bonds because the yield is perilously low and the market in a bubble, they would also gain in a stock market correction.

Of course, the rotation then is back into stocks when they seem to have bottomed out. Cash is very useful at this point, and if the dollar is valued more highly then it could be used to acquire equities in emerging markets at more reasonable prices that have better long-term growth prospects than developed markets.

Judging when to make this switch is another issue but you will only be able to make it to maximum advantage if you are liquid, and the dollar will be the principal beneficiary of a correction as we saw in 2008. But just do not hang on to this parcel when it goes up again.