Trading Day: Fed clock tick-tock

By Jamie McGeever

ORLANDO, Florida (Reuters) -TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist 

U.S. stocks dipped slightly on Tuesday but not before the S&P 500 and Nasdaq hit new highs, as investors braced for an expected rate cut from the Federal Reserve on Wednesday. Gold also hit a new high and the euro reached a four-year peak as the dollar's doldrums deepened.

More on that below. In my column today I look at the surge in dollar hedging this year, and how it ties together two of global investors' main trades this year - long Wall Street, short the U.S. dollar.

If you have more time to read, here are a few articles I recommend to help you make sense of what happened in markets today.

1. Fed avoids shock to independence for now, with Cook toattend meeting; Miran confirmed to open seat 2. Trump says U.S. has a buyer for TikTok 3. Nvidia's new RTX6000D chip for China finds little favourwith major firms, sources say 4. Euro credit convergence erasing core-periphery divide:Mike Dolan 5. China's $19 trillion stock market, once calleduninvestable, lures foreigners again

Today's Key Market Moves

* STOCKS: S&P 500 and Nasdaq hit intraday records beforeslipping, Asia up but Europe sags, weighed down byrate-sensitive sectors and surging euro. * SHARES/SECTORS: Philadelphia semiconductor index hitsnew high, extends winning streak to nine sessions - its best runsince 2017. Warner Bros sinks 6.2% on broker downgrade, mergertarget Paramount Skydance down 5.7%. Energy sector +1.7%,utilities -1.8%. * FX: Dollar index sinks to lowest since July 1. Euro hits4-year high $1.1877. Biggest G10 FX gainer vs dollar is theSwiss franc, +1%. * BONDS: Treasuries shrug off punchy U.S. retail sales andimport prices, yields down 2 bps across the curve. 20-yearauction goes well, bid-to-cover 2.74. * COMMODITIES: Gold hits $3,700 for first time ever. Oilup 1.5% to 2.0% on Russian supply concerns.

Today's Talking Points:

* Eur-eka!

The euro climbed nearly 1% on Tuesday to a four-year high of $1.1877. It is up nearly 15% against the dollar so far this year and on course for its biggest annual rise since 2003. Could it scale $1.20?

The euro's rise is not all that unique, as the dollar is struggling broadly in the face of crumbling rate and yield differentials. But it's potentially a major headache for the ECB, which already sees core inflation in 2027 at 1.8%, below its 2% target.

* Central bank bonanza

The Fed takes center stage this week and is widely expected to resume its monetary easing cycle with a 25 basis point cut. Chair Jerome Powell's steer in his press conference will be critical for the world economy and markets in the months ahead.

But the Fed will be ably supported by a strong central bank cast. This week also sees policy decisions in Brazil, Canada, Japan, Britain, and South Africa, to name a few countries, which will go a long way to setting the tone for assets there, especially exchange rates.

* Love spreads

From euro zone sovereign debt, to U.S. credit and emerging markets, many key bond yield spreads around the world are narrowing to their tightest levels in years. Even decades.

This is as a sign of how sanguine investors are about current market conditions and the near-term investment outlook. Or, it reflects a worrying degree of complacency and suggests stock bubble, economic, policy and other risks are insufficiently priced.

Hedging surge reflects crowded trade - long Wall Street, short U.S. dollar

The rush to hedge U.S. equity exposure this year was initially seen as part of a broad 'de-dollarization' process, reflecting global investors' discomfort with President Donald Trump's trade, economic and foreign policy agendas. But, as the months go by and U.S. stocks roar to fresh tech-fueled highs, this theory seems to be crumbling.

    If 'de-dollarization' were truly taking hold, U.S. stocks and bonds would almost certainly be cheapening. And they're not.

    Wall Street's indices - the S&P 500, Nasdaq, Dow and Russell 2000 - are at record highs, and Treasury bonds across the curve are up this year. Even the 30-year bond.

    However, unhedged overseas investors are currently sitting on much smaller gains or nursing losses because the dollar index is down 11% so far this year.

Hence the rush to hedge.

LIVING ON THE HEDGE

For the first time this decade, hedged inflows into U.S. securities exceed unhedged inflows from abroad, according to analysts at Deutsche Bank. Analyzing more than 500 funds, they calculate that more than 80% of inflows into U.S. equities are now currency-hedged, as are around 50% of flows into U.S. bonds. This means that around two-thirds of total inflows into U.S. assets are now hedged.

This represents a dramatic shift from years gone by, especially in equities.

    Hedging against further dollar downside suggests investors want to protect their U.S. equity and fixed income holdings rather than reduce them. Indeed, demand is holding up remarkably well, given the stretched valuations in stocks and fiscal clouds looming large over bonds.

    When it comes to stocks, investors rarely hedged in the past because of bets that a substantial decline on Wall Street would usually coincide with a crisis and therefore be offset by a safe-haven surge in the dollar.

    But that's not how the 'Liberation Day' tariff turmoil in April panned out.

    "Foreigners may have returned to buying U.S. assets ... but they don't want the dollar exposure that goes with it. For every hedged dollar asset that is bought, an equivalent amount of currency is sold to remove the FX risk," George Saravelos, Deutsche's global head of FX research, wrote on Monday.

    The last official U.S. Treasury figures for the end of June 2024 show that foreign ownership of U.S. stocks was a record 18%. Has that risen?

DOLLAR BEARS

    The first half of the year was peppered with stories of European and Canadian pension funds sharply raising their dollar hedge ratios, fueling the 'de-dollarization' and 'end of U.S. exceptionalism' narratives. In euro terms, the Nasdaq's 12% fall in March was the index's worst month since 2002.

And the dollar is likely to remain under sustained selling pressure, with interest rate and bond yield differentials moving against it with the Federal Reserve almost certain to resume its rate-cutting cycle this week, just as many peers are close to ending theirs.

    The currency could also end up bearing the brunt of lingering investor concerns about the U.S. fiscal trajectory and central bank independence.

Yet amid all this, the profitability and dynamism of Wall Street, and the security and liquidity of Treasuries, continue to attract capital from around the world. U.S. assets remain the only game in town.

THE APRIL 8 TURNAROUND

Global stocks have been buoyant in 2025 too, with many non-U.S. indices outperforming their U.S. counterparts this year.

    But since the 'Liberation Day' turmoil reached its peak on April 8, U.S. stocks have roared back, with the Nasdaq – up nearly 40% since then – one of the best performers.

    Unsurprisingly, foreign investors don't want to miss out.

    According to JP Morgan's equity strategists, foreign investors are not interested in selling their U.S. holdings regardless of current valuations, because growth opportunities abroad are limited, liquidity outside the U.S. is relatively poor, and they want to stay reasonably close to their benchmarks.

    "Most foreign investors continue to park their capital in the U.S. for the long-term growth potential, shareholder-friendly corporates, pro-growth policies, and the AI story," they wrote last week.

    All told, investors seem to be bearish the dollar but bullish Wall Street and Big Tech in particular – a trend that has confounded many experts who assumed 'de-dollarization' would go well beyond the currency. It hasn't. And there's little reason to believe this will change just yet.

What could move markets tomorrow?

* Reserve Bank of Australia assistant governor Brad Jonesspeaks * Indonesia interest rate decision * Japan trade (July) * UK inflation (August) * Euro zone inflation (August, final) * Brazil interest rate decision (after market close) * Canada interest rate decision * U.S. interest rate decision and Fed Chair Jerome Powellpress conference

Want to receive Trading Day in your inbox every weekday morning? Sign up for my newsletter here. 

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

(By Jamie McGeever; Editing by Nia Williams)