Breaking America’s dollar diversification – RBS

Research Team at RBS, notes that the US investors have been the largest dollar diversifiers over the past few decades as their assets have soared to $68trn.

Key Quotes

“From having only 2% of assets abroad in the 1970s, US fund managers now hold 13% of portfolios in foreign markets. The reduction in home bias has been a long term secular trend as US investors have sought higher returns in emerging markets. Thus US diversification has been a structural headwind for the dollar, much greater than central bank FX reserve diversification.”

“But in crises, US diversification abroad stalls or turns to outright repatriation. The 1982 Latam, 1997-98 Asian, 2000 tech and 2008 global financial crises led to structural breaks in US diversification abroad. In those periods, US investors’ risk aversion corresponded with a much stronger dollar.”

“US investors currently hold $9trn of foreign bonds and equities. If higher US yields in 2016 lead to a fresh break in US fund managers’ diversification overseas, the greenback will rally further. And if US funds turn highly risk-averse, repatriation will make the dollar soar as 2008’s collapse in US holdings abroad showed.”