Foreign investors rush to hedge dollar risk amid concerns over Trump’s agenda

Foreign investors in US assets are rushing to hedge against the dollar, a sign of growing concern over the impact of Donald Trump’s agenda on the world’s reserve currency.

According to a Financial Times report on Deutsche Bank’s analysis, hedged investments in US bonds and stocks are outpacing unhedged investments for the first time in four years, following a sharp move since Trump’s election last November.

Deutsche Bank strategist George Saravelos said, “Foreigners may have returned to buying US assets, but they do not want the accompanying dollar risk,” adding that these investors are “eliminating dollar risk at an unprecedented rate.”

According to the Financial Times, this behavior helps explain an apparent paradox in US markets following the sharp sell-off triggered by Trump’s tariff announcements in April: how did Wall Street stocks stage a strong comeback without prompting a dollar recovery?

According to Deutsche Bank’s analysis, 80% of the nearly $7 billion that has flowed into US stock exchange-traded funds domiciled in foreign countries over the past three months has been on a hedged basis. This figure was approximately 20% at the start of the year.

This type of hedge means investors are exposed only to movements in an asset’s price, not to fluctuations between the dollar and their home currency, but they must pay a premium for this protection.

Analysts say the increase in hedging activity has contributed to the dollar’s depreciation of over 10% against other currencies, such as the euro and sterling, this year.

The dollar’s decline pushed the euro above $1.18 on Tuesday, its highest level in four years.

Fund managers report that clients are eager to invest in US stocks amid the artificial intelligence boom but are less willing to bear the associated dollar risk.

Arun Sai, a senior multi-asset strategist at Pictet Asset Management, said the Swiss fund company has increased the dollar hedging on its US stock portfolio, predicting that the dollar is in a “long-term bear market.”

“The dollar will continue to bear the brunt of the erosion of institutional credibility,” Sai added.

According to a September Bank of America survey of global fund managers, 38% of investors want to increase their hedging positions against a weakening dollar, while only 2% want to hedge against a strong one.

“This is not the time to ‘sell America’… It is the time to ‘hedge the dollar’,” said Meera Chandan, co-head of global foreign exchange strategy at JPMorgan.

Weak economic data causing the dollar to fall below its recent trading range could trigger a new wave of currency hedging.

“The flow of hedging will further exacerbate the dollar’s weakness,” Chandan said.

While bond investors often seek to hedge their currency risk to prevent return fluctuations in low-risk investments, the practice is less common among equity investors.

Some noted that the foreign capital flowing into US stocks in recent years contributed to the dollar’s strength, pointing to a virtuous cycle of stock prices and currency gains.

However, this relationship has broken down this year as concerns about the US economy and Trump’s policies have dragged the dollar down. The S&P 500 stock index has risen 12% in dollar terms this year but has fallen 2% in euro terms.

Charles-Henry Monchau, chief investment officer at the Swiss private bank SYZ Group, said he moved to a fully dollar-hedged position in US stocks in March of this year.

Referring to Trump’s statements against a strong dollar, he said, “It was a geopolitical decision. This year is different. This year, you need to be hedged.”

Pension funds in many countries, including Australia and Denmark, are increasingly hedging their dollar exposure.

According to analysis by BNP Paribas, Danish pension funds reduced their unhedged US dollar exposure by approximately $16 billion to $76 billion at the end of June, while Dutch pension funds increased their hedging ratios at the start of the year.

In a report published in June, the Bank for International Settlements stated that currency hedging by institutions outside the US made a “significant contribution” to the dollar’s weakness in April and May, suggesting that Asia-based investors played a key role.

A typical way to hedge against dollar weakness is through derivatives such as currency forwards, which lock in a future exchange rate. These contracts reflect differences in short-term interest rates, and falling US interest rates have made hedging cheaper.

Kamakshya Trivedi, chief foreign exchange strategist at Goldman Sachs, said the falling cost could encourage more hedging from investors in Asia, which in turn could cause the dollar to fall further.