Dollar Selloff Risk Rises as Global Investors Reconsider Currency Risks

The US dollar is facing renewed pressure as global investors reassess their currency risks and the greenback's traditional safe-haven appeal. According to Bloomberg calculations, pension funds and insurers across Japan, Canada, Taiwan, and several other major markets had hedged only 41% of their foreign-currency exposure as of June, the lowest level since at least 2015.

This means that even a modest change in hedging behavior could generate substantial flows in the currency market. The figures cover about $4.6 trillion in foreign-currency holdings and suggest that investors may be rethinking how much currency risk they are willing to carry.

For much of the past decade, leaving US investments largely unhedged made sense because the dollar often strengthened during periods of market stress. However, this assumption is now being challenged as the dollar weakens and the cost of protecting against currency swings falls.