Big hedging of dollars for clients could test banks' capacity, senior UBS trader says

By Alun John

LONDON, Jan 28 (Reuters) - Investors rushing to protect their U.S. assets against dollar depreciation could test banks' ability to meet demand for hedging, said a senior trader at UBS UBSG.S, one of the world's top currency dealers.

The dollar, which slid almost 10% against other major currencies last year, is down a further 2% this month, in part as a result of U.S. policy uncertainty =USD, which was already making some overseas investors seek more protection for their U.S. holdings.

"If dollar hedging were to increase materially, and it’s a conversation we’re having more and more with clients, the issue is structural capacity," Ben Pearson, UBS' global head of G11 short-term interest rate trading, told reporters on Tuesday.

The global foreign exchange market is one of the most liquid, with daily trading volume near $10 trillion, and according to Barclays estimates, investors currently hedge roughly 48% of their U.S. dollar assets.

While hedging ratios are hard to ascertain as they vary between investors and are often private, Barclays estimates they fluctuated between about 46% at the start of last year and 50% in the aftermath of April's tariff shock.

And a renewed sudden surge in hedging could strain the system, UBS' Pearson said.

“A 5-percentage-point rise in hedge ratios for all foreign holders of U.S. assets would imply roughly $1.5 trillion of dollar selling," Pearson said. "The system can only absorb that if there is sufficient bank balance sheet available.”

Banks that provide hedging services to asset managers and companies may have to free significant funds quickly by exiting other trades to meet client demands.

Pearson said the industry was aware of the risks and looking to use other products and workarounds.

But the question is whether “there is a scenario where constraints in capacity lead dealers to make difficult choices around which clients get access to their balance sheet, and which potentially do not,” he said.