Dollar Hedges at Lowest Level Since 2015 as Investors Rethink Exposure

Investors holding significant amounts of US assets have seen their dollar hedges dwindle to just 41% as of June 30, down from over 50% in recent years. This trend has left them exposed if the US currency's haven status continues to fade.

The decline in hedging is attributed to the shrinking rate gap that made hedging expensive, with dollar hedge costs for yen-based investors dropping to a four-year low of 2.75%. For euro-based investors, costs have decreased to a two-year low of 1.32%.

However, experts warn that this trend may be reversed if markets continue to price out Fed hikes and interest-rate differentials narrow. Investors may start rebuilding hedges, which could create a steady source of USD selling pressure.