Dollar Risks Further Selling If Investors Accelerate Currency Hedging
Digital FinanceMacro
Bloomberg News reports that the US dollar may face increased selling pressure if institutional investors worldwide begin to hedge more against currency risk. Data shows that pension funds and insurance companies held US assets with only 41% of their foreign exchange risk hedged as of June 30, the lowest level since 2015. This is based on data from six markets including Japan, Canada, and Taiwan. Meanwhile, hedging costs have declined, and the dollar's status as a safe-haven asset is being questioned. Bloomberg estimates that if the hedging ratio increases by 5 percentage points, it would trigger transactions worth approximately $230 billion out of total assets of $4.6 trillion. Japan is the largest holder of US Treasury bonds, and Japanese investors hedged only 41% of their new foreign bond purchases in the first half of the year, down from 62% in 2024. The cost of hedging the dollar for three months for yen-based investors has fallen to 2.75%, the lowest in four years, and for euro-based investors to 1.32%, the lowest in two years. Analysts suggest that these factors could spur additional dollar selling.
