Global Rush Into Short Dollar Wagers Fuelled by 'Hedge America' Trade

Earlier this year, many investors were convinced that “Sell America” was the only sensible play. But as it turns out, the global approach looks more like “Hedge America” buy U.S. stocks and bonds, but use derivatives to shield against further dollar weakness.

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For the first time in over a decade, flows into dollar-hedged exchange-traded funds tied to U.S. assets have surpassed those into unhedged products, according to Deutsche Bank AG. The shift began mid-year and has accelerated at an extraordinary pace.

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In other words, U.S. markets remain attractive, but with a twist: investors want to avoid direct exposure to the greenback. “The theme of U.S. exceptionalism is alive, but with currency protection built in,” explained Laura Cooper, global investment strategist at Nuveen in London.

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This surge in hedging explains why the dollar is hovering near its weakest levels since 2022, even as U.S. equities have continued to climb. Lower borrowing costs from the Federal Reserve are amplifying the trend by reducing the expense of hedging currency exposure.

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“The bulk of this adjustment is still ahead,” said Sahil Mahtani, director at Ninety One Asset Management’s Investment Institute. He estimates that global investors could ultimately add around $1 trillion in new hedges essentially restoring hedging levels to where they were a decade ago. Back then, before a strong dollar and soaring U.S. stocks made protection seem unnecessary, global portfolios carried higher hedge ratios.

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Major institutions, including Deutsche Bank, State Street, BNP Paribas, and Société Générale, expect this wave of hedging to weigh heavily on the dollar through 2026. After falling roughly 9% this year, the greenback may find it difficult to stage a meaningful rebound, especially with the European Central Bank standing pat and the Bank of Japan preparing to hike rates.

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One of the most widely used strategies is selling dollars forward to lock in exchange rates. That activity often translates into real selling pressure in spot markets. The cost of hedging, meanwhile, hinges on the gap between U.S. and foreign interest rates.

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Concerns over the dollar intensified back in April when President Donald Trump rolled out sweeping tariffs. U.S. stocks and bonds dropped and unusually, so did the dollar. Investors shifted into other safe havens like the Swiss franc, euro, and yen.

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While equities have since rebounded, the dollar notched its worst first-half performance since the 1970s. According to the Bank for International Settlements, hedging by non-U.S. investors was a key driver of that weakness in April and May.

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But investors’ unease goes beyond tariffs. Trump’s push to reshape the Fed, his campaign for aggressive rate cuts, and his dismissal of government officials over unfavorable data all raise questions about the independence of U.S. institutions. Add to that rising tensions with allies and domestic crackdowns, and the dollar faces deeper challenges.

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As Steven Barrow, strategist at Standard Bank, put it: “If markets believe the Fed is easing under political pressure, it makes sense to love U.S. stocks and Treasuries, but dislike the dollar.”

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Despite dollar skepticism, demand for U.S. bonds remains strong. In July, foreign holdings of Treasuries hit a record high. Overseas investors collectively hold about $20 trillion in U.S. equities and $14 trillion in debt, spanning Treasuries, mortgage-backed securities, and corporate bonds.

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Mahtani of Ninety One estimates that reversing even modest declines in hedge ratios over recent years could generate about $1 trillion in dollar-selling activity. Still, tracking exact flows is difficult, given that global currency trading reaches roughly $7.5 trillion a day.

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State Street data shows hedging ratios on U.S. assets have stabilized around 56% after falling from 70% in mid-2023. “Foreign investors are unlikely to dump U.S. assets altogether,” said Lee Ferridge, strategist at State Street. “Instead, they’ll raise hedge ratios and that’s what matters most for the dollar.”

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Of course, not everyone is piling into hedges. “For our actively managed fixed-income strategies, we haven’t added currency or Treasury hedges,” said Ryan Chang, head of fixed income at CTBC Investments in Taipei. He expects the dollar to decline only gradually, limiting the urgency to hedge.

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For others, hedging is a longer process. Canadian, European, and Australian pension funds, for example, have already started increasing their hedge ratios. “We’ll see more programs approved now that committees have had time to review the risks,” said Alfonso Peccatiello, chief investment officer at Palinuro Capital in Amsterdam.

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Paris-based Eleva Capital began hedging its U.S. equity holdings earlier this year when the euro traded near $1.05, its weakest since late 2022. The euro has since strengthened above $1.17, delivering double-digit gains against the dollar.

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“We put the hedge on expecting the Trump administration to push for a weaker dollar,” said Stephane Deo, senior portfolio manager at Eleva. The firm had rotated heavily into European equities late last year and cut U.S. exposure ahead of Trump’s tariff announcement.

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“We’ve since reinvested in the U.S.,” Deo added. “But we’re keeping the hedge for now, we expect U.S. stocks to rise alongside a softer dollar.”

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