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

By Jamie McGeever

ORLANDO, Florida, Sept 16 (Reuters) - 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.

(The opinions expressed here are those of the author, a columnist for Reuters)