Dollar hedging frenzy fades, promising relief for greenback

Just months after a US tariff shock whacked the dollar, a rush by overseas investors to protect US holdings from the sliding currency has slowed sharply — a vote of confidence that’s helping the greenback recover from its worst rout in years.

- ALUN JOHN NAOMI ROVNICK

While analysts say investor hedging is higher than it has been historically, such activity has slowed from the period immediately after the April 2 “Liberation Day”, when US President Donald Trump announced sweeping trade tariffs.

At that time, foreign investors holding US assets were hit by tumbling stock and bond prices and a plummeting dollar. Nimble investors moved to hedge against a further dollar decline and the trend was expected to gain momentum. Instead, it has slowed, allowing the US currency to stabilise.

“The conversations we're having with clients now suggest that these (hedging) flows are less likely to come as imminently as the conversations we had back in May suggested they would,” said David Leigh, Nomura’s global head of FX and emerging markets.

The dollar index, which tracks the greenback against other major currencies, has rallied nearly 4% since the end of June, when it was nursing losses of almost 11% after its biggest first-half dive since the early 1970s.

Data on hedging is limited, and analysts extrapolate from scarce public figures and numbers compiled by banks and custodians.

Analysis of client positioning by BNY, one of the world’s largest custodians, shows they were very long US assets in early 2025, suggesting they didn’t anticipate much additional dollar weakness and were happy to operate without much hedging.

That changed in April and hedging is now higher than normal, although lower than in late 2023 when markets began to anticipate Federal Reserve rate cuts.