Weakness in the US dollar triggers an escalation of institutional risk hedging: overseas asset management accelerates hedging exposure to US stock exchange rate risks

The Zhitong Finance App learned that the New York financial market has recently shown a new trend: overseas asset management institutions and pensions are speeding up the construction of a weak US dollar firewall to avoid the double impact of US stock market investment portfolios due to exchange rate fluctuations. This defensive layout stems from the sudden correlation between the trend of the US dollar and the performance of US stocks. When the US dollar index fell 6.5% and hit a three-year low due to the global tariff policy announced by the Trump administration on April 2, there was a rift in the safe-haven logic of “strengthening the US dollar provides a buffer when US stocks fall”, forcing investors to re-examine currency risk hedging strategies.

The data disclosed by Russell Investment Group reveals the turning trajectory of institutional investors: among European and British pension clients, about 10% of their asset portfolios have raised the hedging ratio for international stock investments, and some activists have jumped the risk coverage ratio from 50% to 75%. Van Loo, head of fixed income and foreign exchange strategy at the agency London, pointed out that this shift reflects investors' deep concerns about the continued weakness of the US dollar. The US dollar index has fallen 10% since this year, while the S&P 500 index recorded a strong rebound of 24% during the same period after experiencing a sharp fall in April. The MSCI Global Stock Index (excluding the US) soared 16%, and traditional asset allocation logic was seriously challenged.

BNP Paribas's asset management operation is more representative: this management agency, which manages the assets of multinational sovereign wealth funds and central banks, is systematically reducing its exposure to the US dollar. Its foreign exchange portfolio manager Vasallo revealed that the agency sold the US dollar through a two-pronged combination of stocks and fixed income to simultaneously establish long option positions in the euro, yen, and Australian dollar, in stark contrast to the previous strategy of slightly “going long on the dollar.” Behind this shift is a prediction of the uncertainty of US trade policy and the deterioration of the international capital flow environment. “More confrontational policy mechanisms are reshaping the global financial landscape,” Vasallo said bluntly.

It is worth noting that there are differences in the judgments of different agencies on the valuation of the US dollar. St. James Square Capital chose to maintain the British pound hedging limit after a strategic review in June to reduce overseas currency risk exposure by 20%. Chief Investment Officer Onuek Hussey admits that this move “significantly optimized the customer return curve.” However, the agency also slightly lowered the US dollar hedging ratio, believing that the current US dollar exchange rate is close to long-term fair value. This conflicting mentality was confirmed in Northern Trust's research: Fernandes, its head of global monetary management, pointed out that the widening asset risk correlation rift is driving a surge in demand for hedging, and “once hedging discussions are initiated, it is almost inevitable that the hedging ratio will eventually be raised.”

The data confirms a subtle change in market sentiment: Russell Investment statistics show that the Euro hedged version of the MSCI US Index achieved zero profit in the past 12 months, while the unhedged version plummeted 8.3%. The exchange rate of the US dollar against the euro fell sharply by 13% during the same period. This exchange rate loss directly impacted overseas investors holding 30 trillion US dollars of US securities (including 17 trillion US stocks and 12 trillion US dollars in debt). Willis, a macro strategist at BNY Markets, observed that the sell-off volume of US dollar forward contracts hit a four-year high. Even in the face of a rebound in the US dollar that may be caused by tariff policy fluctuations or geopolitical conflicts, investors still choose to vote with their feet.

In this silent currency defense war, foreign exchange derivatives have become the core weapon: asset managers sell the US dollar against basic currencies such as the euro and the pound through forward contracts, and build risk barriers with futures instruments. When the dollar depreciates, the value of these hedging positions climbed just to offset the exchange rate losses in the stock portfolio. As McKenna, head of fund solutions at MillTech, said, foreign exchange hedging operations, which were once hidden behind the scenes, are back on the core agenda of institutional decision makers due to abnormal fluctuations in the US dollar.