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Financial Globalization and Its Implications for Asset Allocation in a Dollar World

Ramu Thiagarajan, Hanbin Im, Jiho Han, Aaron Hurd and Gaurav Mallik
The Journal of Investing August 2022, 31 (5) 7-27; DOI: https://doi.org/10.3905/joi.2022.1.225
Ramu Thiagarajan
is a senior investment advisor at State Street Corporation in Stamford, CT
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Hanbin Im
is a quantitative researcher at State Street Associates in Cambridge, MA
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Jiho Han
is a senior quantitative researcher, FICC Research at State Street Global Advisors in Boston, MA
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Aaron Hurd
is a senior portfolio manager, Currency at State Street Global Advisors in Boston, MA
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Gaurav Mallik
is chief portfolio strategist at State Street Global Advisors in Boston, MA
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Abstract

Unprecedented monetary policy measures carried out by the US Federal Reserve in response to the COVID-19 pandemic have raised the question of whether US dollar hegemony will continue going forward. In this article, the authors examine the multi-faceted nature of dollar hegemony with a focus on its relationship with globalization. They find that the US dollar is the dominant currency in global economic activities ranging from trade to cross-border banking, and this USD strength is reflected in the ability of US Treasuries to diversify local economic shocks. While they find that US Treasuries provide historically better diversification for local equity risk than local sovereign debt, in an ultra-low interest rate world, investors will likely need to consider alternative hedging approaches. As an illustration of a potential alternative, the authors turn to the currency markets and show that a short euro versus long Japanese yen position has had stable to improving performance as a hedging tool. The key message is that alternative hedging strategies merit a robust discussion and consideration in a low-yield environment.

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The Journal of Investing: 31 (5)
The Journal of Investing
Vol. 31, Issue 5
August 2022
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Financial Globalization and Its Implications for Asset Allocation in a Dollar World
Ramu Thiagarajan, Hanbin Im, Jiho Han, Aaron Hurd, Gaurav Mallik
The Journal of Investing Jul 2022, 31 (5) 7-27; DOI: 10.3905/joi.2022.1.225

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Financial Globalization and Its Implications for Asset Allocation in a Dollar World
Ramu Thiagarajan, Hanbin Im, Jiho Han, Aaron Hurd, Gaurav Mallik
The Journal of Investing Jul 2022, 31 (5) 7-27; DOI: 10.3905/joi.2022.1.225
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  • Article
    • Abstract
    • RELATIONSHIP BETWEEN GLOBALIZATION AND DOLLAR HEGEMONY
    • IMPLICATIONS FOR PORTFOLIO MANAGEMENT
    • CONCLUSION
    • ACKNOWLEDGMENTS
    • APPENDIX A
    • APPENDIX B
    • ENDNOTES
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