Dollar Hedging by Global Investors Hits Near-Pre-Tariff Levels, State Street Says

Global investors have reduced dollar hedges to near pre-tariff levels, according to State Street. This is a reversal from recent months when hedges increased due to the slide in US stocks and the greenback. Despite concerns, hedging flows have not been a significant challenge to the dollar. The hedging ratio is now at 21.6%, down 2 percentage points from May and similar to the level in early April.

Global investors have reduced their hedges against a weaker dollar to near pre-tariff levels, according to State Street. This reversal comes after recent months saw an increase in dollar hedging due to the slide in US stocks and the greenback following Donald Trump's tariff policy shock in April. The hedging ratio, which measures the proportion of foreign investors' dollar-denominated assets hedged against currency risk, has dropped to 21.6%, down 2 percentage points from May and similar to the level in early April [1].

Michael Metcalfe, head of macro strategy at State Street Markets, noted that this shift is not as dramatic as past moves in the hedge ratio, which have seen changes of up to 10%. He attributes the reduction in hedging to investors' longer-term perspective on currency protection. Typically, investors assess the best level of currency protection over a period of three to five years, and on this basis, the dollar still appears to be a decent hedge against stock market downturns.

The recent recovery in US stocks, with the S&P 500 surging back to all-time highs, may also have contributed to the easing of dollar hedges. Additionally, the dollar received some respite in July as the worst-case scenarios for trade tariffs appeared to have been averted.

The cost of hedging has also been a factor. Three-month dollar hedging costs for euro-based investors climbed significantly from a low of 1.31% in September 2024 to more than 2.40% in June and July of 2025, and remain above 2.20%. Given this, investors may be holding back to see how market conditions evolve before making decisions on hedging.

The trend towards reduced dollar hedging comes amid a broader shift in global investment flows. Global ETF flows reached $900 billion in the first half of 2025, a 25% increase year-over-year, driven by investor appetite for sustainable and thematic ETFs, as well as continued demand for fixed income and equity products [2]. This growth was seen across regions, with the US, Europe, and Asia-Pacific driving the increase.

While the dollar's resilience in the face of reduced hedging is a positive sign, it is essential to monitor the situation as market conditions and investor sentiment can change rapidly. State Street's data suggests that the dollar remains a significant factor in global financial markets, and investors should continue to assess their hedging strategies accordingly.

References:
[1] https://www.bloomberg.com/news/articles/2025-08-18/global-investors-cut-back-on-dollar-hedging-state-street-says
[2] https://www.ainvest.com/news/global-etf-flows-surge-25-yoy-900b-h1-2025-state-street-2508/