“Buy U.S. assets but hedge against the dollar”! Trillions of dollars in hedging pressure on the dollar

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In global capital markets, a precise and subtle strategy seems to be going mainstream—“hedging the United States.”

On one hand, international funds continue to flow into the U.S., pushing U.S. debt holdings to historic highs while actively chasing the rebound in U.S. stocks; on the other hand, a wave of shorting the dollar—potentially reaching a trillion dollars in scale—is brewing.

Major Wall Street banks such as State Street, Deutsche Bank, and BNP Paribas have all stated that they expect this hedging wave to become the core force restraining the dollar’s performance next year.

It’s worth noting that Deutsche Bank has observed that, starting from the middle of this year, the inflow of funds into “USD-hedged” U.S. asset ETFs surpassed “non-USD-hedged” ETFs for the first time in a decade. The bank adds that the speed of this shift is “unprecedented.”

A Trillion-Dollar Wave: Hedging Trades Make a Comeback

How large is this potential hedging wave?

Sahil Mahtani, Director at the Institute of Investment Research at Ninety One Asset Management, estimates it at about $1 trillion.

He explains that this would only restore global investors’ current hedging ratios on over $30 trillion of U.S. stocks and bonds to the average level of the past decade.

Moreover, at that time, a strong dollar and a thriving U.S. stock market led many to believe that forex risk exposures needed no protection.

Now, major Wall Street banks including State Street, Deutsche Bank, BNP Paribas, and Société Générale have all stated that they expect the ongoing rise in hedging activity to exert significant downward pressure on the dollar next year.

This pressure means that, even if the dollar tries to rebound from its nearly 10% drop since 2025, it will struggle—especially as the ECB is staying put while the Bank of Japan may raise rates as soon as later this year.

At the operational level, one of the most common methods overseas investors use to hedge is to sell dollar forward contracts to lock in exchange rates, which usually translates directly into selling pressure on the dollar in the spot market, with trading costs mainly determined by the interest rate differential between the U.S. and other currencies.

April Was the Catalyst

Traditionally, the dollar has been a safe haven for investors during crises and economic stress, but this perception was severely challenged in April this year.

At that time, punitive global tariffs announced by the Trump administration triggered not only a sell-off of U.S. stocks and bonds but also a synchronous drop in the dollar. Investors turned to the Swiss franc, euro, and yen for safety. The Bank for International Settlements (BIS) later analyzed that non-U.S. investors’ hedging activity was “an important factor” in the dollar’s weakness at the time.

For nervous investors, concerns go far beyond tariffs themselves. The unprecedented reshuffling of the Fed’s Board of Governors by the White House, pressure for rapid rate cuts, dismissal of government senior data officials releasing unwanted employment reports, disputes with long-term allies, and increasingly harsh crackdowns on opposition groups and the media have all shaken global capital’s traditional trust in the dollar.

Steven Barrow, a strategist at Standard Bank in London, wrote in a report:

“If the market speculates that the Fed is cutting rates under White House pressure to stimulate the economy, then the logical move is to ‘fall in love with U.S. stocks and short-term Treasuries, but hate the dollar.’”

The latest evidence of this “love” is that official data shows the total value of U.S. Treasuries held by foreigners rose to a record high in July.

Currently, overseas investors hold about $20 trillion in U.S. stocks and about $14 trillion in U.S. Treasuries in total. Mahtani cites academic research showing that, in recent years, their hedging ratio on U.S. fixed income has fallen by about five percentage points, and their hedging ratio on equities by about two percentage points. He states:

“Just a slight adjustment to these modest moves will generate about $1 trillion in dollar selling in the forex market.”

The Institutional Landscape: From Cautious Observation to Active Positioning

Precisely tracking global investors’ hedging activity is extremely challenging, with daily global forex turnover reaching about $7.5 trillion and data varying among institutions.

Data from State Street, one of the world’s largest custodian banks, shows that after dipping in April, the hedging ratio of foreign investors’ U.S. assets has stabilized at around 56%, compared to about 70% in mid-2023. The bank’s strategist Lee Ferridge says:

“The hedging ratio is critical for the dollar’s direction. Foreigners are unlikely to sell U.S. assets; what they’re most likely to do is increase their hedging ratios.”

Of course, not all fund managers have jumped into the hedging wave. For example, Ryan Chang, head of fixed income at CTBC Investments in Taipei, said: “For our actively managed fixed income products, we have not increased hedging positions for currency risk or U.S. Treasury yields.” He believes that the dollar is unlikely to fall sharply as the Fed only cuts rates gradually.

Nevertheless, overall, the trend of increasing hedging is already clear. A Bank of America survey this month of 196 global fund managers (managing around $490 billion in assets) showed that 38% said they were seeking to add currency hedges to guard against a weaker dollar—the highest level since June. Some major investors, such as pension funds in Canada, Europe, and Australia, have also signaled an increase.

Stephane Deo, a senior portfolio manager at Paris-based Eleva Capital, has been a front-runner. His firm established hedges at the beginning of the year when the euro-dollar rate was at 1.05 (near its lowest since the end of 2022); since then, the euro has appreciated above 1.17. Deo partly based his logic on expecting the Trump administration to weaken the dollar. He says:

“We have reinvested in the U.S. Therefore, our dollar hedge is a position we intend to keep, because right now we expect the U.S. stock market to rise as the dollar weakens.”

Risk Disclosure and DisclaimerThe market has risks; investment needs caution. This article does not constitute personal investment advice and does not take into account the special investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, viewpoints, or conclusions in this article fit their specific circumstances. Invest accordingly and at your own risk. ```