Investing.com — Unusually low volatility in major currency markets could create an attractive opportunity for investors to hedge U.S. dollar exposure, even as the greenback remains supported by higher interest rates and geopolitical uncertainty, said UBS analysts.
Major currency pairs have remained relatively stable despite the Iran war, higher oil prices, and changing expectations for central bank policy. The dollar has held firm, but large swings across developed-market currencies have been limited.
EUR/USD has traded within a relatively narrow range in recent months, while USD/JPY has remained contained despite concerns about Japanese intervention and shifting rate expectations.
The calm market backdrop has pushed currency volatility near the lower end of its one-year range. Three-month implied volatility on EUR/USD has fallen to levels that make hedging strategies less expensive than they have been for much of the past year.
Several factors currently supporting the dollar could weaken over time. A de-escalation in Middle East tensions could ease pressure on energy markets and reduce demand for traditional safe-haven assets.
Attention could also shift back to monetary policy. If the Federal Reserve resumes easing at a later stage, interest-rate support for the dollar may begin to diminish.
Against that backdrop, periods of dollar strength may offer opportunities for investors to hedge existing exposure and diversify currency holdings.
Among preferred currencies, UBS highlighted sterling following its recent weakness after the UK local elections. The pound continues to benefit from relatively attractive carry and could strengthen against both the dollar and the Swiss franc.
The Australian dollar was also identified as a favored currency, supported by attractive yields, resilient trade fundamentals, and growing demand from investors seeking alternatives to the U.S. dollar.
The report also remains constructive on the New Zealand dollar, Norwegian krone, and Swedish krona. These currencies could benefit if investors broaden their exposure beyond the dollar and other traditional safe havens.
The firm concluded that today’s low-volatility environment presents a favorable opportunity to review currency allocations and add hedges at a relatively low cost before broader market trends begin to shift.
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