Only a few months after U.S. tariff shocks pushed the dollar sharply lower, the rush by overseas investors to hedge their U.S. holdings has eased. This slowdown has helped the greenback recover from one of its steepest declines in decades.
Analysts note that hedging levels remain elevated compared with historical norms. However, activity has clearly cooled since the period that followed the April 2 “Liberation Day” announcement, when U.S. President Donald Trump unveiled sweeping trade tariffs.
At that time, foreign investors faced falling U.S. stock and bond prices as well as a rapidly weakening dollar. Many moved quickly to protect themselves from further declines, and the trend was expected to snowball. Instead, hedging momentum faded, giving the dollar room to stabilise.
Nomura’s global head of FX and emerging markets, David Leigh, said client discussions recently suggest that the wave of hedging flows is no longer imminent, unlike what investors anticipated earlier this year.
The dollar index has now risen nearly 4% since late June. At that point, it had suffered an 11% slide — its worst first-half performance since the early 1970s.
Data on hedging activity remains limited. Analysts rely on partial figures from custodians and internal research. BNY, one of the world’s largest custodians, reported that its clients were heavily invested in U.S. assets at the start of 2025 and were not bracing for major dollar weakness. That changed in April. Hedging increased, though it remains below levels seen in late 2023, when markets began expecting Federal Reserve rate cuts.
“The dollar diversification story this year is talked about more than it is acted upon,” said Geoff Yu, senior strategist at BNY.
Other major custodians share similar findings. State Street said foreign equity managers’ hedging rose to 24% by the end of October, up from 20% in February, but still well below the past peaks above 30%. They also noted a slowdown in recent weeks.
The trend varies by region. A survey by National Australia Bank found no major change in hedging among Australian pension funds, while Denmark’s central bank data shows local pension funds stabilising their hedging levels after an initial increase.
Columbia Threadneedle CIO William Davies said his firm initially moved to protect U.S. equity positions from further dollar weakness but has since unwound part of those hedges, expecting the currency to hold steady.
No Snowball Effect
Hedging itself influences currency movements. Adding protection against a falling dollar requires selling the currency, while removing hedges requires buying it. Combined with shifting interest rates, this can create rapid feedback loops.
Earlier in the year, many feared a self-reinforcing cycle — a falling dollar prompting more hedging, driving it down further. “In the end, that snowball effect didn’t materialise,” said HSBC’s global FX head Paul Mackel. He added that it’s still something to monitor in the year ahead, though not the base case.
Investor behaviour may nonetheless be shifting. BlackRock estimates that 38% of inflows into Europe, Middle East, and Africa-listed U.S. equity ETFs this year have gone into funds with currency hedges. That’s a major change from 2024, when 98% of inflows were unhedged.
Costs, Correlations, and Complexity
The cost of hedging varies by market and is heavily influenced by interest rate differentials. This is a significant factor shaping investor decisions.
Japanese investors currently pay an annualised cost of around 3.7% to hedge against dollar weakness, according to Russell Investments’ Van Luu. Euro-based investors face a lower cost near 2%. Luu noted that euro investors usually ignore hedging costs around 1%, but at 2% the decision becomes much more difficult.
Asset correlations also matter. Traditionally, the dollar strengthens when U.S. stocks fall, giving international investors natural protection. But this pattern broke down in April, contributing to the hedging surge. In recent weeks, however, the dollar has held steady even as equities slid again.
Benchmark constraints add another challenge. Many funds try to outperform unhedged benchmarks, making it harder to introduce hedges without major strategy changes. Fidelity International recommends European investors gradually hedge about half their U.S. exposure, but says the shift requires significant governance adjustments.
If interest rates move in ways that weaken the dollar and hedges become cheaper, demand for protection may increase again. According to Nomura’s Leigh, there is still “a lot of room” for more hedging — the uncertainty lies in how fast investors will move.
“That’s what the FX market is trying to figure out,” he said.
