BNY Mellon Manager Sees Tapering Leading to Rising Currency

NEW YORK and LONDON, July 29, 2013 — U.S.-based investors with international portfolios might consider the merits of hedging as the U.S. dollar appears to be entering a period of sustained strengthening, according to Mellon Capital Management, the San Francisco-based multi-asset-class investor for BNY Mellon.

"A long bullish run by the U.S. dollar could detract significantly from the returns of international portfolios that are not hedged against the currency," said Sam Valtenbergs, senior quantitative/research analyst of Mellon Capital and the author of the white paper, Dollar Longs Buoyed by the Inevitable Taper.

Investors in exchange-traded funds (ETFs) might be surprised at the differences in returns from two separate ETFs, if one is hedged and the other is not, Valtenbergs said.

Since the beginning of May, the market has been focusing on the expected winding down of the U.S. Federal Reserve's quantitative easing program, according to the report.  Over that period, the dollar has been strengthening against its developed market peers. In addition, the paper notes that emerging markets rates and currencies have had increased volatility.

Investors had been expecting the combination of the U.S. trade and budget deficits to continue to put downward pressure on the value of the U.S. dollar, but the budget sequestration that became effective on March 1 has helped to rein in the U.S. budget deficit, Mellon Capital said.

While the current account remains in negative territory, it has been stable for years, the report said.  If the current account and budget deficits demonstrate continuing improvement, Mellon Capital said the dollar could continue to strengthen.

Mellon Capital's report said that the dollar is likely to outperform during periods of risk aversion and underperform during periods of heightened risk appetite.  However, the currency could outperform over the longer term if the U.S. economy can continue to strengthen in a benign inflation environment, the report said.

"When one considers the relative inexpensiveness of hedging the currency risk of international portfolios against a rise in the U.S. dollar, it could prove to be good value for U.S.-based investors," said Vassilis Dagioglu, head of asset allocation, portfolio management, Mellon Capital.

Founded in 1983 by innovators in the investment management field, Mellon Capital Management Corporation applies a disciplined and analytical approach to global investment management strategies. As of June 30, 2013, the firm had $313.0 billion in assets under management, including assets managed by dual officers of Mellon Capital Management Corporation, The Bank of New York Mellon and The Dreyfus Corporation, and $6.4 billion in overlay strategies. Additional information about Mellon Capital is available at www.mcm.com.

BNY Mellon Investment Management is one of the world's leading investment management organizations and one of the top U.S. wealth managers, with $1.4 trillion in assets under management. It encompasses BNY Mellon's affiliated investment management firms, wealth management services and global distribution companies. More information can be found at http://www.bnymellon.com/.

BNY Mellon is a global investments company dedicated to helping its clients manage and service their financial assets throughout the investment lifecycle. Whether providing financial services for institutions, corporations or individual investors, BNY Mellon delivers informed investment management and investment services in 35 countries and more than 100 markets. As of June 30, 2013, BNY Mellon had $26.2 trillion in assets under custody and/or administration, and $1.4 trillion in assets under management. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Additional information is available on http://www.bnymellon.com/, or follow us on Twitter @BNYMellon.

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