Foreign Investors' Hedging Ratio on US Assets at Lowest Level
Major global market players investing in US assets have reduced their hedging ratios against a potential weakening of the dollar to their lowest point since 2015.
Major players investing in US assets have reduced their hedging ratios against a potential weakening of the dollar to the lowest level since 2015. This situation increases the risk of sharp movements in foreign exchange markets if market sentiment deteriorates abruptly.
Historic Drop in Hedging Ratios
Investors in markets such as Japan, Canada, and Taiwan had hedged only 41 percent of their foreign currency positions as of June 30. This ratio represents the lowest level recorded since at least 2015.
The sudden hedging tendency observed last year after Trump implemented global tariffs weakened over time as the dollar stabilized, and investors returned to their old habits.
The Safe Haven Role of the Dollar
The dollar typically functioned as a safe haven during periods of increased market volatility by rising or maintaining its value. This mitigated US stock and bond losses.
High hedging costs also eroded investors' willingness to make additional payments. Today, however, both high costs and the dollar's safe-haven status are being questioned simultaneously.
Risk of High-Volume Sell-Offs
According to Bloomberg's calculations based on $4.6 trillion worth of assets across six markets, a 5 percentage point increase in hedging ratios could trigger approximately $230 billion in selling transactions.
Nuveen executive Laura Cooper pointed out that due to the massive size of US assets held by foreigners, even small changes in ratios could create significant foreign exchange flows in the market.