Published by Global Banking and Finance Review
Posted on November 21, 2025
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By Alun John and Naomi Rovnick
LONDON (Reuters) -Just months after a U.S. tariff shock whacked the dollar, a rush by overseas investors to protect U.S. holdings from the sliding currency has slowed sharply - a vote of confidence that's helping the greenback recover from its worst rout in years.
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 U.S. President Donald Trump announced sweeping trade tariffs.
At that time, foreign investors holding U.S. 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 U.S. 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 U.S. 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.
"The dollar diversification story this year is more talked about than actioned upon," said Geoff Yu, BNY's senior market strategist.
Other giant custodians reported a similar picture.
State Street Markets' analysis of the assets State Street has under custody and administration showed that as of end October, foreign equity managers’ hedging of their dollar holdings was 24%, a 4 percentage-point increase since February, but well below the 30%-plus hedge ratio they have seen in the past.
They too said it had slowed in recent weeks.
It varies by market too. A November National Australia Bank survey of Australian pension funds found "no material change in hedging behaviour towards U.S. equities".
Danish central bank data, however, shows hedging by pension funds there has stabilised after increasing post-April.
Columbia Threadneedle CIO William Davies said that the firm initially moved to protect its U.S. stock holdings against further dollar weakness but has since unwound some of its hedges, betting the currency won't decline further.
NO SNOWBALL EFFECT
Hedging itself causes currencies to move - adding protection against dollar downside to a previously unhedged position effectively involves selling the greenback, and vice versa.
If combined with shifting interest rates, the effect can be dramatic - a dollar selloff can spark more hedging, sending it lower still.
"People, earlier this year, were getting excited that this snowball effect would develop, though in the end it didn't really," said HSBC's Paul Mackel, global head of FX research.
For next year, "it's something to keep an eye on, but it's not our baseline scenario".
Still investor behaviour may be shifting. BlackRock estimates that 38% of flows into Europe, Middle East and Africa-listed U.S. equity exchange-traded products this year have been into those with FX hedges, a meaningful change from 2024 when 98% of flows were unhedged.
COST, CORRELATIONS AND COMPLICATIONS
Cost is also a factor, and depends on rate differentials and so varies by market. This may help explain some of the reluctance to hedge positions.
Japanese investors pay around an annualised 3.7% to hedge against dollar weakness, estimates Van Luu, Russell Investments' global head of solutions strategy for fixed income and FX.
This is a sizeable sum - if dollar/yen holds steady for a year, an investor is down 3.7% versus an unhedged peer. The equivalent cost for a euro-funded investor is around 2%.
"I have a rule of thumb for euro investors, if the cost is around 1% they don't care much, but if it's 2% then it becomes a factor," Luu said.
Asset correlations matter too. Traditionally the dollar strengthens when stocks fall, meaning overseas investors are effectively protected on their U.S. positions.
That did not happen in April, contributing to the hedging rush. This month, the dollar held steady as stocks tumbled again.
Change is also complicated for the many investors who aim to outperform a fixed benchmark if that benchmark is unhedged.
Fidelity International recommends Europe-based investors move gradually towards hedging 50% of their dollar exposure, but Salman Ahmed, head of macro and strategic asset allocation, notes it is a "very involved" process which can require governance and benchmark changes.
If interest rates move against the dollar and it starts to weaken again, and hedges become cheaper, pressure for change may build.
"There's still lots of scope for dollar investments to be hedged, whether that comes to pass and how quickly is an open question," said Nomura's Leigh.
"That's what the FX market's trying to get its head around."
(Reporting by Alun John and Naomi Rovnick; additional reporting by Elisa Martinuzzi; Editing by Dhara Ranasinghe and Kirsten Donovan)
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