Consider currency correlation

How has the US dollar reacted to the Iran conflict? Prior to February 27th, there was really very little going on (with) the US dollar. Actually, on an index measurement, the dollar was flat. It actually rendered a negative .08% return, which is as flat as you can get. Bond markets actually were also actually thriving during the month of February, and then on February 27th, the world just flipped upside down with the escalation of the US/Iran affair.

At that point, everything converged to one economic factor. Traditional economic metrics became unusable. Everything started to orbit around the price of oil as a byproduct of what was happening in the Middle East. And it wasn't just the dollar. It was practically every asset class across the globe. The dollar was trading around the valuations of oil prices, as were equity markets, global fixed income markets and subsets of the fixed income global markets like high yield, investment grade and even EM.

What should investors be mindful of when considering currencies and diversification? Diversification is a great characteristic to have in any portfolio. And a great asset class to introduce that component are currencies. Inherently, they provide natural diversification. And why is that? It's because you're not held hostage to one political regime, to one fiscal monetary policy, to one economic cycle. That inherently provides you with a broader-based portfolio. And the most important facet of diversification is that it allows you to weather times of volatility and times of uncertainty. We like a more blended approach to avoid concentration within your diversification selection. So, they don't correlate to each other. What is going to end up happening is having a portfolio with a global component that makes you look diversified, but those selections are all correlated with each other.

For instance, you could pick countries or currencies that are highly dependent on oil valuations. For instance, Norway is a very big oil producer. It's benefited a lot from recent current events in the Middle East, but other economies that are oil importers have actually been hurt by recent events. So, what you want to make sure is that your selection of countries are not all correlated with each other because then you're not diversified in its truest form, you're actually very concentrated.