The great diversifier of traditional investing has been to hold international stocks. You get an allocation in country risk that may be less correlated with the US and there is a diversification benefit from holding a foreign currency. We have now seen the carnage from a global liquidity crisis and international diversification in the last month.
European stock markets down over 25%, in dollars down another 10%;
Brazilian stock market down over 35%, in dollars down another 14%;
Australian stock market down over 22%, in dollars down another 20%.
The exception has been Japan down over 36% but in dollars only down 27.5%. Currency trading matters Hedging matters. With the foreign markets down capital outflows will need to buy dollars. If hedges are in place, rebalancing will mean dollar buying. The problem gets worse as the feedback from equity to currencies cause more selling. This does not show up in normal times, but at times of extreme stress, the cost is high.
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