Dollar Exposed as Foreign Investors Abandon Currency Hedges

The dollar's stability is at risk due to unusually high exposure from foreign investors. According to Bloomberg calculations, these investors have hedged only 41% of their foreign-currency exposure as of June 30, which is the lowest since at least 2015.

This low level of hedging means that a sudden shift in market sentiment could lead to steeper declines in the dollar's value. The rate gap that made hedging expensive has been shrinking, with three-month dollar hedge costs for yen-based investors dropping to a four-year low of 2.75%, and for euro-based investors falling to a two-year low of 1.32%.

Investors are returning to an approach that had worked for much of the past decade: holding large shares of US assets without hedging against currency swings. However, this strategy is being challenged as the dollar's haven status and high hedging costs are both being questioned.