Buying US dollars to speculate on US stocks has turned from a "win-win" into a "double kill"!

For many years, investors in London, Paris, and Tokyo have had an almost perfect "money printing machine" strategy: buying dollars and investing the returns in the S&P 500 and Nasdaq stocks. The return on U.S. stocks not only far exceeds that of their domestic markets, but the continuous appreciation of the dollar has also doubled these returns.

However, this once seemingly invincible trading combination suddenly faced a crisis after Trump launched a global trade war. So far this year, the S&P 500 index has fallen by 6%, but for investors in U.S. stocks priced in euros and yen, due to the sharp decline of the dollar (the dollar index has dropped nearly 8% this year), their losses have ballooned to an astonishing 14%. The sharp turn and unpredictability of White House policies are causing unprecedented unease among investors who have long viewed the U.S. as the ultimate safe haven.

Benoit Peloille, Chief Investment Officer at Natixis Wealth Management in Paris, bluntly stated: "This is a double whammy; you are losing on both stocks and currency."

Hedging Wave Approaches: Panic Drives Protective Investments

In the chaotic situation of the past month, although Trump may continue to retreat on trade war issues, many foreign investors have realized the risks of pouring large amounts of money into dollar assets.

Currently, many investors are eager to add currency hedging measures to their U.S. stock portfolios worth about $18 trillion. This portfolio size now accounts for nearly one-fifth of the total market capitalization of U.S. stocks.

Both Morgan Stanley and Bank of America have stated that they are seeing an increasing number of clients purchasing protective assets against dollar depreciation. Alexandre Hezez of Group Richelieu in Paris noted that his fund has now reached the maximum allowable hedging level because "everything has been turned upside down."

The Brutal Trade-off of Hedging Costs and Returns

Traders worried about a decline in the dollar exchange rate typically sell dollars in the forward market. For investors in Swiss francs or yen, the three-month hedging cost, when annualized, is about 4%; for euro investors, this cost exceeds 2%.

While this hedging strategy can offset losses when the dollar falls, it also means they miss out on potential gains from a rising dollar exchange rate. Additionally, ongoing hedging costs will gradually erode investment returns.

Shoki Omori, Chief Strategist at Mizuho Securities in Tokyo, vividly described: "For managers who entered at higher exchange rates, every point the dollar falls against the yen feels like rubbing salt in a wound."

Options are another popular strategy, with data from the U.S. clearinghouse showing that euro-dollar contract trading is setting new records. However, higher volatility also means more expensive hedging costs. For euro investors, hedging costs have increased by 15% since the beginning of the year.

Is America's Dominance Shaking?

A key question is: does this signify that international investors are beginning to gradually withdraw from the U.S. market? Allianz Insurance Group believes that these funds seem to have no better place to go. However, they also point out that there is currently about $28 trillion in international investment balances, and even if only a small portion of that money flows out of the U.S., it could have a significant impact on exchange rates and global asset prices.

Many strategy analysts feel that the euro will remain strong while the dollar continues to weaken, a situation that could persist for several years. George Saravelos of Deutsche Bank says that America's "exceptional" status has begun to waver. He estimates that by the end of 2027, the euro-to-dollar exchange rate could rise to 1.30, a level not seen in a decade. Kirstine Kundby-Nielsen, a currency analyst at Danske Bank, also believes that Europe is becoming increasingly attractive to investors, predicting that the euro could rise to $1.22 in the next 12 months.

Hezez of Group Richelieu is unwilling to take risks. He began to hedge before Trump announced reciprocal tariffs on April 2, when the euro-to-dollar exchange rate was around 1.05. Now, the euro has surpassed 1.3.

"My currency hedge has covered some of the losses in the U.S. stock market," he said, "I plan to stick to this strategy in the short term, although I believe it is usually counterproductive in the long run."