Final answer:
A commodity investor might hedge an exposure in oil with a position in US dollars to mitigate the risk of fluctuating oil prices. They use this strategy to offset the inverse relationship between oil prices and the value of the dollar, stabilizing potential returns.
Step-by-step explanation:
The institutional investor that might choose to hedge an exposure in oil with an opposite position in US dollars is likely to be a commodity investor. Hedging is a risk management strategy employed to offset losses in investments by taking an opposite position in a related asset. In the context of commodity investing, when an investor has a long position in oil, they are exposed to the risk of oil prices falling. To mitigate this risk, they might take a short position in the US dollar, especially if they expect the relationship between the dollar and oil prices to be inversely correlated - meaning if oil prices go down, the value of the US dollar might go up, and vice versa.
International financial investors will increase the demand for US dollars when they decide to purchase US government bonds, leading to an appreciation of the US dollar exchange rate. As such, a weakening dollar would increase the cost of foreign investment, as more dollars are needed to purchase the same amount of foreign assets. Conversely, a stronger dollar would make US investments in oil, which is typically transacted in dollars, more expensive for foreign investors, thus impacting the oil prices.
Therefore, a commodity investor, who seeks to minimize the impact of fluctuating oil prices on their portfolio, is more likely than an equity investor or a global fixed income investor to hedge with US dollars, looking to reduce volatility from market movements affecting oil prices.