US Dollar: Fed-driven hedge rebuilding revives selling pressure – BNY

BNY’s Geoff Yu argues that the July Fed meeting marked a peak in Dollar dehedging rather than an end to U.S. exceptionalism. Cross-border investors are rebuilding USD hedges, reducing effective unhedged U.S. exposure while maintaining broadly solid underlying demand for U.S. assets. Dollar selling is concentrated against GBP, EUR and CAD, while JPY and CNY remain notable exceptions.

Fed decision shifts Dollar hedging

"The July Fed appears to have marked a dollar dehedging peak rather than an end to U.S. exceptionalism. Cross-border investors are adding USD hedges again, with net U.S. asset exposure falling sharply after the July 29 decision. Dollar selling is concentrated in GBP, EUR and CAD, while JPY and CNY remain notable exceptions."

"Our USD “net hedge” indicator moved from an excess hedge position of close to 15% to around half its trailing 12-month level by the July 29 Fed meeting. The speed of that shift highlights how strongly investors had re-engaged with the dollar."

"Our data indicate that between July 29 and August 5, net U.S. asset exposure fell from 0.47 to 0.34, a significant drop in the “U.S. exceptionalism” view. However, the long-term average for net U.S. exposure is close to flat – changes in USD hedges tend to track asset values. So overall U.S. exceptionalism remains solid."

"Stripping out month-end effects, the data show that the Fed outlook remains material for hedging levels. The Fed will therefore need to remain sensitive to such FX effects, especially if the dollar is increasingly viewed as an inflation pass-through channel."

"Express concerns around the Fed through higher USD hedge ratios, rather than outright reductions in U.S. asset exposure."