Foreign investors are increasingly hedging against a weakening U.S. dollar, a trend driven by concerns over the currency’s diminishing role in diversifying U.S. equity portfolios. According to a Reuters report, asset managers and pension funds are actively reducing dollar exposures, with some clients significantly increasing their hedge ratios. This shift comes as the dollar’s correlation with U.S. assets has drawn more attention, particularly after global tariffs were announced by the Trump administration, causing a sharp decline in U.S. stock indexes and the dollar.
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Data from IndexBox indicates that foreign investors hold over $30 trillion in U.S. securities, with equities accounting for about $17 trillion and long-term debt for over $12 trillion. The dollar has declined 10% this year, impacting portfolio strategies and prompting managers at firms like BNP Paribas Asset Management to adjust currency exposures. Meanwhile, the S&P 500 has rebounded, up 5.3% year-to-date, while the MSCI gauge of global stocks, excluding the U.S., has risen 16%.
Hedge ratios have increased among European and UK pension fund clients of Russell Investments, with some raising their hedges from 50% to 75%. Similarly, Northern Trust’s global head of currency management, Marcus Fernandes, notes that the increased correlation of risks is prompting faster decisions to increase hedge ratios. The dollar’s 13% fall against the euro has further highlighted the importance of hedging strategies, as evidenced by the performance of euro-hedged versus unhedged versions of the MSCI USA index.
As the dollar’s volatility continues to draw attention, fund managers are employing a range of strategies including forward selling and derivatives like options to manage currency exposure. This trend underscores the growing focus on foreign exchange risk management in boardrooms, driven by renewed dollar volatility and policy uncertainties.
