Foreign investors can exploit cheaper dollar hedges

The long-awaited resumption of the Federal Reserve's rate-cutting cycle is likely to cheapen hedging of dollar exposure for foreign investors and increase their motivation to guard more of their US assets against further currency weakness.

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In September, the US central bank lowered interest rates by an expected 25 basis points to 4.00-4.25 per cent on labour market concerns and indicated more cuts would follow later this year.

That cut narrows the interest-rate differential between the US and other developed countries, which helps to lower the hedging costs for foreign pensions, sovereign funds and other institutional investors, managers and analysts said.

The ICE US Dollar Index is down about 10 per cent this year, partially driven by foreign investors increasing hedging activity on worries about the impact of US trade and tariff policies on their US assets, market participants said.