The weakening of the US dollar triggers an upgrade in institutional risk aversion: overseas asset management accelerates hedging against the exchange rate risk exposure of US stocks

According to Zhitong Finance APP, the New York financial market has recently shown new trends: overseas asset management institutions and pension funds are accelerating the construction of a firewall against the weakness of the US dollar, aiming to avoid the dual impact on US stock market portfolios due to exchange rate fluctuations. This defensive layout stems from the sudden change in the correlation between the dollar's performance and US stock performance. When the dollar index plummeted by 6.5% to a three-year low due to the global tariff policy announced by the Trump administration on April 2, the traditional perception that "the dollar strengthens to provide a buffer when US stocks fall" showed cracks, forcing investors to reassess currency risk hedging strategies.

Data disclosed by Russell Investment Group reveals the trajectory of institutional investors' shift: among pension clients in Europe and the UK, about 10% of asset portfolios have increased the hedging ratio for international stock investments, with some aggressive investors raising their risk coverage ratio from 50% to 75%. The head of fixed income and foreign exchange strategy in London, Van Lu, pointed out that this shift reflects deep concerns among investors about the continued weakness of the dollar. Since the beginning of this year, the dollar index has cumulatively fallen by 10%, while the S&P 500 index has rebounded strongly by 24% after experiencing a sharp decline in April. The MSCI global stock index (excluding the US) has surged by 16%, posing a severe challenge to traditional asset allocation logic.

The operations of BNP Paribas Asset Management are more representative: this management institution, which oversees multiple sovereign wealth funds and central bank assets, is systematically reducing its dollar exposure. Its foreign exchange portfolio manager, Vassallo, revealed that the institution is selling dollars through a dual approach of equity and fixed income portfolios, while simultaneously building long positions in euro, yen, and Australian dollar options, contrasting sharply with its previous slight "long dollar" strategy. This shift is driven by predictions of uncertainty in US trade policy and the deterioration of the international capital flow environment, with Vassallo stating, "A more confrontational policy mechanism is reshaping the global financial landscape."

It is noteworthy that different institutions have diverging judgments on the valuation of the dollar. St. James's Square Capital chose to maintain the upper limit of pound hedging after its June strategy review, compressing overseas currency risk exposure by 20%. Chief Investment Officer Onuekwusi admitted that this move "significantly optimized the client yield curve." However, the institution also slightly lowered the dollar hedging ratio, believing that the current dollar exchange rate is close to its long-term fair value. This contradictory mindset is corroborated by research from Northern Trust: its global currency management head, Fernandez, pointed out that the widening cracks in asset risk correlation are driving a surge in hedging demand, stating, "Once hedging discussions are initiated, raising the hedging ratio almost becomes inevitable."

Data confirms the subtle changes in market sentiment: Russell Investment statistics show that the euro-hedged version of the MSCI US index achieved zero returns over the past 12 months, while the unhedged version plummeted by 8.3%, with the dollar against the euro falling by 13% during the same period. This exchange rate loss directly impacts overseas investors holding $30 trillion in US securities (including $17 trillion in US stocks and $12 trillion in US bonds). BNY Markets macro strategist Willis observed that the selling volume of dollar forward contracts has reached a four-year high, and even in the face of potential dollar rebounds triggered by tariff policy fluctuations or geopolitical conflicts, investors still choose to vote with their feet In this silent currency defense battle, foreign exchange derivatives have become the core weapon: asset managers sell U.S. dollars against basic currencies such as euros and pounds through forward contracts, supplemented by options tools to build risk barriers. When the U.S. dollar depreciates, the value of these hedging positions rises, precisely offsetting the exchange rate losses of stock portfolios. As McKenna, head of fund solutions at MillTech, stated, the foreign exchange hedging operations that were once hidden behind the scenes have re-emerged at the core of institutional decision-making agendas due to the unusual fluctuations of the U.S. dollar