The dollar has struggled significantly in 2025, unlike stocks and bonds, which have shown slight gains despite ongoing volatility. Currently, the dollar has decreased by approximately 10% against a basket of major currencies, breaking past correlations with other asset classes.
The once optimistic narrative surrounding U.S. exceptionalism and a strong dollar has faded, particularly due to President Donald Trump’s controversial economic policies and isolationist stance that have led many investors to reevaluate their investments in U.S. assets. One primary reason for the dollar’s decline is its diminished role as a safe haven for investors.
Non-U.S. investors typically use forward, futures, or options markets to hedge against currency fluctuations. Recent trends indicate that due to rising risk premiums associated with U.S. assets, there’s been an increase in hedging activities, notably among equity holders.
While bond investors usually hedge their dollar exposure at rates between 70% and 100%, equity investors have been slower to do so, averaging only 10% to 30%. Significant developments can be seen in foreign pension and insurance funds.
For instance, recent data indicates that Danish funds increased their hedge ratios for U.S. assets from 65% to 75% within a short span, marking the most considerable increase in over ten years. It is suggested that similar trends are emerging in other regions, including Scandinavia and Canada, contributing to the shift in dollar exposure.
The dollar’s recent performance has altered traditional relationships with stocks and bonds, leading to unusual correlations. While the dollar typically rises when stocks fall, this year, both have declined simultaneously.
As analysts point out, the dollar’s challenges may persist as foreign holdings continue to influence hedging strategies. Increased hedge ratios could lead to significant foreign exchange flows, particularly under ongoing market uncertainty.