Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

U.S. stocks dipped slightly on Tuesday but not before the S&P 500 and Nasdaq hit new highs, as investors braced for an expected rate cut from the Federal Reserve on Wednesday. Gold also hit a new high and the euro reached a four-year peak as the dollar's doldrums deepened. 

More on that below. In my column today I look at the surge in dollar hedging this year, and how it ties together two of global investors' main trades this year - long Wall Street, short the U.S. dollar. 

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

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* Eur-eka!

The euro climbed nearly 1% on Tuesday to a four-year high of $1.1877. It is up nearly 15% against the dollar so far this year and on course for its biggest annual rise since 2003. Could it scale $1.20? 

The euro's rise is not all that unique, as the dollar is struggling broadly in the face of crumbling rate and yield differentials. But it's potentially a major headache for the ECB, which already sees core inflation in 2027 at 1.8%, below its 2% target. 

 * Central bank bonanza

The Fed takes center stage this week and is widely expected to resume its monetary easing cycle with a 25 basis point cut. Chair Jerome Powell's steer in his press conference will be critical for the world economy and markets in the months ahead.

But the Fed will be ably supported by a strong central bank cast. This week also sees policy decisions in Brazil, Canada, Japan, Britain, and South Africa, to name a few countries, which will go a long way to setting the tone for assets there, especially exchange rates. 

* Love spreads

From euro zone sovereign debt, to U.S. credit and emerging markets, many key bond yield spreads around the world are narrowing to their tightest levels in years. Even decades. 

This is as a sign of how sanguine investors are about current market conditions and the near-term investment outlook. Or, it reflects a worrying degree of complacency and suggests stock bubble, economic, policy and other risks are insufficiently priced. 

The rush to hedge U.S. equity exposure this year was initially seen as part of a broad 'de-dollarization' process, reflecting global investors' discomfort with President Donald Trump's trade, economic and foreign policy agendas. But, as the months go by and U.S. stocks roar to fresh tech-fueled highs, this theory seems to be crumbling. 

If 'de-dollarization' were truly taking hold, U.S. stocks and bonds would almost certainly be cheapening. And they're not. 

Wall Street's indices - the S&P 500, Nasdaq, Dow and Russell 2000 - are at record highs, and Treasury bonds across the curve are up this year. Even the 30-year bond.

However, unhedged overseas investors are currently sitting on much smaller gains or nursing losses because the dollar index is down 11% so far this year. 

Hence the rush to hedge.