"Buy US assets but hedge the US dollar! Trillions of dollars hedge pressure on the US dollar"

In the global capital markets, a precise and subtle strategy seems to be emerging as a mainstream trend - "hedging against the United States". On one hand, international funds continue to flow into the United States, pushing the amount of US debt holdings to historic highs, while also actively pursuing the rebound of US stocks. On the other hand, a wave of shorting the US dollar with a potential scale of trillions of dollars is also brewing. Several Wall Street giants such as Morgan Stanley, Deutsche Bank, and BNP Paribas have stated that they predict this wave of hedging activities will become a core force suppressing the trend of the US dollar next year. It is worth noting that Deutsche Bank also observed that since the middle of this year, the amount of funds flowing into "USD-hedged" US assets ETFs surpassed the amount flowing into "non-USD-hedged" hedge funds for the first time in a decade. The bank added that the speed of this shift is "unprecedented". Trillion-dollar wave: The comeback of hedging trades How big is the potential size of this hedging wave? Sahil Mahtani, Director of Investment Research at Ninety One Asset Management, estimates it to be around $1 trillion. He explains that this would only restore the hedging ratio of over $30 trillion worth of US stocks and bonds currently held by global investors to the average level of the past decade. And, at that time, the strong US dollar and thriving US stock market made many believe that there was no need for any protection against foreign exchange risk. Now, several Wall Street giants such as Morgan Stanley, Deutsche Bank, BNP Paribas, and BNP Paribas Industrial Bank have stated that the increasing hedging activities will put significant pressure on the trend of the US dollar next year. This pressure means that even if the US dollar tries to rebound from its nearly 10% decline since 2025, it will be an uphill battle, especially with the European Central Bank standing still and the Bank of Japan possibly raising interest rates as early as later this year. In terms of operation, one of the common hedging methods used by foreign investors is selling US dollar forward contracts to lock in the exchange rate, which usually translates directly into selling pressure on the US dollar in the spot market, and the trading costs mainly depend on the interest rate differential between the US and other currencies. April is the catalyst Traditionally, the US dollar has been seen as a safe haven for investors during crises and economic pressures, but this perception was severely challenged in April of this year. At that time, the Trump administration's announcement of global punitive tariff policies not only triggered selling in US stocks and bonds but also a simultaneous decline in the US dollar, prompting investors to turn to the Swiss franc, euro, and yen for refuge. The Bank for International Settlements (BIS) later analysis stated that the hedging activities of non-US investors was "an important reason" for the weakening of the US dollar at that time. For anxious investors, concerns go far beyond tariffs themselves. The White House's unprecedented reshuffling of the Federal Reserve Board, pressuring it to cut interest rates quickly, dismissing senior government data officials who released reports the government didn't like, disputes with longtime allies, and increasingly harsh crackdowns on opposition groups and the media have shaken the traditional trust of global capital in the US dollar. Steven Barrow, a strategist at Standard Bank in London, wrote in a report: "If the market speculates that the Fed is lowering interest rates to stimulate the economy under pressure from the White House, the logical thing to do would be to 'love US stocks and front-end Treasuries but hate the US dollar'." The latest evidence of this "love" is that official data shows that foreign holdings of US government debt reached a historic high in July. Currently, foreign investors hold around $20 trillion in US stocks and around $14 trillion in US government debt. Mahtani cited academic research stating that in recent years, their hedging ratio for US fixed income has decreased by about five percentage points, and for stocks by about two percentage points. He said: "Just a slight change in these moderate measures will create about $1 trillion in US dollar selling foreign exchange trading." Institutional consensus: From cautious observation to active positioning Precisely tracking the hedging activities of global investors is extremely challenging, as the daily trading volume of the global foreign exchange market is around $7.5 trillion, and the data of each institution may therefore differ. Data from one of the world's largest custody banks, Morgan Stanley, shows that after a decline in April, the hedging ratio of foreign investors holding US assets has stabilized at around 56%, compared to around 70% in mid-2023. Lee Ferridge, a strategist at the bank, said: "The hedging ratio is crucial to the direction of the US dollar. It is unlikely that foreigners will sell US assets, but what they are most likely to do is increase the hedging ratio." Of course, not all fund managers have plunged into the hedging wave. Ryan Chang, head of fixed income at CTBC Investments in Taipei, China, stated, "For actively managed fixed income products, we have not increased hedging positions against currency risk or US bond yields." He believed that with the Federal Reserve gradually lowering interest rates, the US dollar is unlikely to decline significantly. However, overall, the trend of increasing hedging is clear. A survey by Bank of America of 196 global fund managers managing around $490 billion in assets this month showed that 38% of respondents said they were seeking to increase currency hedging to counter the weakening US dollar, the highest level since June. Some large investors, such as pension funds in Canada, Europe, and Australia, have also signaled increases in holdings. Stephane Deo, Senior Portfolio Manager at Paris-based Eleva Capital, is a pioneer. His firm established hedging positions at the beginning of the year when the euro-to-dollar exchange rate was at 1.05 (close to the lowest point since the end of 2022), and since then the euro has appreciated to above 1.17. Deo's logic partly lies in his expectation that the Trump administration will push for a weaker US dollar. He said: "We have reinvested in the United States. Therefore, our US dollar hedging is a position we intend to keep, as we expect US stocks to rise while the US dollar weakens." This article was reprinted from "Wall Street View", author: Gao Zhimou; GMTEight Editor: Liu Jiayin.