My overall portfolio is a bit heavy on the dollar-bearish theme (commodities, emerging markets, etc), so I would like to allocate a small portion into an asymmetric hedge: if dollar rallies, the hedge would sky rocket. What do you think are the asset classes or markets that would benefit the most from a hypothetical dollar rally over the course of, say, the next year? Thanks!
From an strategy standpoint, US equities would benefit, especially companies that import intermediate goods. Consumer discretionary (retail and food), domestic-facing industrials, regional banks, etc. are some good sectors.
Hmm it's quite a while ago that dollar and us equities positively correlated. Hence, not a good hedge. Also, I don't see any relationship with a stronger US dollar and domestic consumer names. Why make things complicated? If the view is of a stronger US dollar then buy the G8 usd basket against cross currencies.
UUP. 3X Leveraged US$ Bullish Fund. Simple and straightforward. Also great hedge against stocks crashing: Reserve currency becomes safe haven.
With this pay fees for leverage they provide. With an fx basket you can go from 1:1 to 10:1 leverage paying currently very low margin rates with a good broker. When rates diverge later on you even get paid because you are short the carry yields.
Thank you everyone for your responses. If I was to play this hedge with a LEAP call (or put) option rather than actually buying into the underlying, what vehicle would be more appropriate? Remember, the goal is to sacrifice a small and controlled (fixed) percentage of the portfolio, aiming for an asymmetrical return if the dollar does ultimately raise.