LIVE MARKETS-April's dollar selloff a lot to do with hedging, BIS says

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APRIL'S DOLLAR SELLOFF A LOT TO DO WITH HEDGING, BIS SAYS

If you can remember as far back as April, there was lots of angst about the dollar, which was weakening, even though U.S. yields were rising.

The Bank of International Settlements has a report out that says a lot of this is down to non-U.S. investors hedging more of the FX risk in their U.S. bonds or equities portfolios.

Investors reduced hedge ratios in recent years, as it became more expensive - due to higher short-term rates - and because of bullish views on the dollar.

Though when the dollar started to depreciate in April, "to mitigate these losses, some opted to increase their hedge ratio, ex post. This amplified depreciation pressures on the dollar" write the BIS analysts.

They note hedged purchases of dollar bonds don't have a currency effect, as they involve the simultaneous purchase and sale of a currency, but hedging a bond initially purchased unhedged, is a dollar selling flow.

Their evidence for the increased dollar hedging is changes in changes in the cross-currency basis between March and April/May 2025

"For several Asian currencies and the euro, the basis against the US dollar declined in April/May (becoming more negative)"

This is "consistent with higher demand to hedge dollar investments."

(Alun John

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