The Dollar’s Decline Could Accelerate!

Foreign investors who have made large investments in U.S. assets have reduced their currency hedging, used to protect against a weakening dollar, to one of the lowest levels in recent years. This could leave the dollar under additional pressure as market uncertainty increases. According to Bloomberg’s calculations across six markets, investors in countries such as Japan, Canada and Taiwan had hedged only 41% of their foreign-currency positions as of June 30. This was the lowest level since at least 2015.

Hedging is a strategy investors use to reduce risks arising from changes in exchange rates. Since U.S. assets account for a large share of global portfolios, an increase in hedging could lead to greater dollar selling. According to Bloomberg, based on $4.6 trillion in foreign-currency assets, a 5-percentage-point increase in the hedging ratio would correspond to roughly $230 billion in dollar sales. This could put additional pressure on the dollar’s exchange rate.