Global investors pump funds into U.S. stocks, abandoning dollar
Global investors are holding on to their U.S. assets but are racing to hedge their dollar exposure, showing rising unease about what Donald Trump’s economic plans mean for the world’s most used currency.
Since Trump returned to the White House, the flow of money into hedged U.S. investments has jumped to levels not seen in four years, according to Deutsche Bank.
George Saravelos, head of FX strategy at the bank, said foreign buyers “may have returned to buying U.S. assets, but they don’t want the dollar exposure that goes with it,” adding they’re cutting their dollar positions “at an unprecedented pace.”
Investors hedge despite booming U.S. stocks
This behavior helps explain why the dollar has stayed weak, even as U.S. stocks continue rising. Wall Street had taken a hit in April when Trump rolled out his so-called “liberation day” tariffs, but the S&P 500 has since rebounded and is now up 12% in dollar terms.
Yet, for investors in Europe, that return drops to negative 2% in euro terms, because the dollar itself has sunk more than 10% this year against major currencies.
About $7 billion has moved into U.S. equity ETFs owned abroad in the past three months. Deutsche Bank found that 80% of this was hedged, compared to just 20% at the start of the year. Hedging protects investors from currency moves, allowing them to track the performance of the asset alone, although it comes with extra costs.
This surge in currency protection is a key factor behind the drop in the dollar, which helped push the euro above $1.18 for the first time in four years. With U.S. interest rates falling, the cost of these hedges has also come down, making it more attractive.
Pictet Asset Management’s Arun Sai said his firm increased its dollar hedges on U.S. stocks, expecting the greenback to keep sliding. “It will continue to be the dollar that takes the brunt of eroding institutional credibility,” Arun said. He described the trend as part of a “secular bear market” for the currency.
Global funds ramp up hedging as dollar weakens
A Bank of America survey in September found 38% of global fund managers planned to increase their hedges against a weakening dollar, compared to just 2% preparing for a stronger one.
Meera Chandan, who co-heads global FX strategy at JPMorgan, said the trend wasn’t about dumping U.S. assets altogether. “It’s not a ‘sell America’ moment. It’s a ‘hedge dollar’ moment,” Meera said. She warned that further soft economic data could push the dollar lower and trigger more currency hedging.
Bondholders usually hedge more often to smooth out returns. Stock investors, until recently, didn’t bother. But now, investors say the benefits of hedging outweigh the costs. In past years, foreign buying of U.S. stocks had helped lift the dollar itself. This year, that link has broken.
Charles-Henry Monchau, CIO at Swiss private bank SYZ Group, said he moved to fully dollar-hedged U.S. stock positions in March. “It was a geopolitical call,” Charles-Henry said, pointing to Trump’s public stance against a strong dollar. “This year, you need to be hedged.”
Large pension funds are doing the same. Danish pension managers cut their unhedged dollar holdings by $16 billion in the second quarter, bringing it down to $76 billion. Dutch pension funds also raised their dollar hedges earlier this year. Funds in Australia have taken similar steps.
In June, the Bank for International Settlements said currency hedging by investors outside the U.S. played a big role in dragging down the dollar in April and May. BIS researchers said Asian investors were especially active in hedging during that period.
Investors usually use currency forwards to hedge. These derivatives allow them to lock in a future exchange rate, and since the cost is tied to interest rate gaps, falling U.S. rates have made them cheaper.
Kit Juckes, FX strategist at Société Générale, said investors had long avoided paying high costs to hedge the dollar. But now, “there’s a tipping point that’s quite close,” Kit said. “People ask, ‘why haven’t I done this yet?’”
Kamakshya Trivedi, chief FX strategist at Goldman Sachs, said falling hedging costs could encourage more Asian investors to join the wave, which could lead to even further weakness in the dollar.
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