Clients at one of the world’s largest custodians have sharply increased their hedging of U.S. dollar exposure, taking protection that is materially larger than the currency risk implied by their U.S. holdings, a senior strategist said.
According to Geoff Yu, senior EMEA market strategist at BNY, clients are now implementing U.S. dollar hedges that are almost 20% larger than what would be required if they simply wanted to match movements in the value of their U.S. bond and equity positions. That compares with hedging levels of roughly 10% at the end of last year, and represents the highest such activity since late 2023, Yu told Reuters on Friday.
The uptick in hedging comes as the dollar has continued to weaken in the opening, volatile weeks of 2026, extending a period of gyrations that followed a more than 9% fall in the greenback last year. Yu said the decline in the dollar has been accompanied by renewed market debate over whether investors will reduce holdings of U.S. assets or seek greater protection when holding them - a dynamic that began to surface during last year’s rout.
Yu noted the data do not identify which specific client jurisdictions are responsible for the bulk of the increased hedging this year, but he flagged that it was likely more concentrated among European clients hedging U.S. exposure. He also emphasized that BNY’s asset flows do not show a reweighting away from U.S. assets - clients have not reduced allocations to U.S. equities and Treasuries in their portfolios, he said.
Rather than an outright sell-off of U.S. assets, Yu identified differences in interest rates across major economies as a more probable catalyst for the rise in hedging. The Federal Reserve is widely expected to remain on a path of lowering borrowing costs, while several other major central banks are approaching or have begun raising rates, a configuration that is typically negative for the dollar, he explained.
"The rise in client hedging activity has coincided with the Fed staying relatively dovish and we’re seeing a lot more pivots in other central banks," Yu said, describing the policy mix as a likely driver of client behaviour.
To derive the hedging metric, Yu assumed client portfolios at BNY are weighted roughly 80% in U.S. Treasuries and 20% in equities, reflecting the fact that a large share of assets under BNY’s custody are fixed income. He cautioned that clients with greater equity allocations would likely appear to be hedging less under this calculation.
Separately, the strategist’s comments included reference to investor tools assessing specific U.S. equities. One such evaluator, ProPicks AI, was described as measuring companies using more than 100 financial metrics and has highlighted past winners including Super Micro Computer with a cited gain of 185% and AppLovin with a cited gain of 157% in prior periods. The evaluator was noted as agnostic and focused on fundamentals, momentum and valuation.
Implications
- Increased hedging activity points to elevated currency risk management among institutional investors holding U.S. assets.
- Fixed income portfolios comprise a large share of assets under custody, informing the hedging ratio calculations.
- Interest rate differentials and central bank policy trajectories are central to current hedging behaviour.