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Foreign investors in US assets are rushing to hedge their exposure to the dollar, in a sign of increased nervousness about the impact of Donald Trump’s agenda on the world’s dominant currency.
Hedged investments into US bonds and equities are outstripping unhedged holdings for the first time in four years, according to Deutsche Bank analysis, after a sharp move since Trump’s election last November.
“Foreigners may have returned to buying US assets, but they don’t want the dollar exposure that goes with it,” said Deutsche Bank strategist George Saravelos, adding those investors were “removing dollar exposure at an unprecedented pace”.
The behaviour helps explain an apparent paradox in US markets since the sharp sell-off triggered by Trump’s “liberation day” tariff announcements in April: how Wall Street stocks have staged a roaring comeback without triggering a recovery in the dollar.
Around 80 per cent of the roughly $7bn of money that has flowed into foreign-domiciled US equity exchange traded funds over the past three months has been on a hedged basis, according to Deutsche’s analysis. That figure was about 20 per cent at the start of the year.
Such hedging means investors are purely exposed to the move in the price of an asset and not to any movement between the dollar and their home currency, although they must pay for the privilege.
An increase in hedging activity has, say analysts, helped fuel a sell-off in the dollar this year of more than 10 per cent against a basket of its peers including the euro and the pound. The greenback’s fall pushed the euro above $1.18 on Tuesday to a four-year high.
Fund managers say clients are keen to keep their exposure to US stocks amid an AI boom but are less willing to hold the dollar risk.
Arun Sai, senior multi-asset strategist at Pictet Asset Management, said the Swiss fund firm had increased dollar hedging of its US stock holdings, in a bet that the dollar is in a “secular bear market”.
“It will continue to be the dollar that takes the brunt of eroding institutional credibility,” he added.
A Bank of America survey of global fund managers in September showed that 38 per cent of investors were looking to increase their hedging positions against a weaker dollar, compared with just 2 per cent looking to hedge against a stronger dollar.
“It’s not a ‘sell America’ moment . . . It’s a ‘hedge dollar’ moment,” said Meera Chandan, co-head of global FX strategy at JPMorgan. Weak economic data that pushed the dollar below its recent trading range could spark a fresh flurry of currency hedging, she said. “The hedging flow will exacerbate the dollar weakness move.”
While bond investors typically try to hedge their currency exposure to avoid big swings in returns on what are supposed to be lower-risk investments, it has been less popular among stock investors.
Some have pointed to a virtuous cycle of share price and currency gains, where foreign money piling into US stocks in recent years had itself helped strengthen the dollar.
But that relationship has become unstuck this year as the dollar has been dragged lower by worries over the US economy and Trump’s policies. The S&P 500 equity index is up 12 per cent in dollar terms this year, but 2 per cent lower in euro terms.
Charles-Henry Monchau, chief investment officer at Swiss private bank SYZ Group, said he moved to a fully dollar-hedged position in US equities in March this year.
“It was a geopolitical call,” he said, citing Trump’s remarks arguing against a strong dollar. “Things are different this year. This year, you need to be hedged.”
Pension funds in a number of countries including Australia and Denmark have increasingly hedged their dollar exposure.
Danish pension funds had reduced their unhedged US dollar exposure by around $16bn at the end of June to $76bn, according to BNP Paribas analysis, while Dutch pension funds increased their hedging at the start of the year.
The Bank for International Settlements said in a paper in June that currency hedging by non-US institutions made an “important contribution” to dollar weakness in April and May, and suggested Asia-based investors had played a significant role.
A typical way to hedge against dollar weakness is through derivatives such as currency forwards that lock in a future exchange rate. These contracts reflect differences in short-term interest rates and falling US rates have made the hedges cheaper.
“There’s [been] a lot of reluctance to pay that much to hedge the dollar,” said Kit Juckes, chief FX strategist at Société Générale. However, there is a “tipping point that’s quite close”, he added, where people ask “why haven’t I done this yet?”
Kamakshya Trivedi, chief FX strategist at Goldman Sachs, said the falling cost could encourage more hedging from Asian investors and in turn cause further falls in the dollar.
Data visualisation by Ray Douglas
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