Currency’s Comeback: Seeking to Add Value from FX in the New World of Interest-Rate Volatility

Currency can be a crucial yet often overlooked component of investment returns. And in the stable, ultra-low interest-rate environment that defined the post-Global Financial Crisis period until early 2022, FX may have received scant attention from some investors.

But in the wake of aggressive monetary-tightening by central banks in most developed and emerging economies to tackle the global explosion in inflation, interest-rate volatility has returned. This has led to gyrations in currency markets, awakening interest in active currency management and reminding investors, particularly fixed-income followers, that FX can be a potential source of alpha.

In this article, Lazard Asset Management provides its short- and long-term thoughts on the outlook for the U.S. dollar, including the potential structural challenges ahead for the greenback. Alongside a deep dive into the major Latin American currencies, LAM also reviews the broad prospects for emerging market (EM) currencies in the context of the current monetary cycle, challenging the assumption that looming rate cuts by EM central banks before anticipated rate-lowering by the Fed portends poorly for EM currencies.

Finally, LAM explores potential opportunities for alpha-generating currency hedging that may rely less on directional currency views to realize value.

Click here to read the report in full.