A strategy for US investors to counter domestic market risk involves buying European bonds and not hedging the currency. This combines a modest ~3% bond yield with an expected ~7% appreciation of the euro against the dollar, driven by diverging central bank policies.
Despite low unemployment and high inflation, the Fed is cutting rates to preempt a potential job market slowdown. This "run hot" strategy could accelerate an economy already showing signs of heat from high valuations and low credit spreads, creating significant risk.
Despite facing similar pressures like high inflation and slowing labor markets, the US Federal Reserve is cutting rates while European central banks remain on hold. This significant policy divergence is expected to weaken the U.S. dollar and create cross-Atlantic investment opportunities.