The U.S. dollar’s strong rally is receiving fresh support as major global pension funds reduce currency hedges established after last year’s market turmoil, easing selling pressure on the greenback, according to a Reuters report. The dollar has been supported by higher U.S. real interest rates after stronger inflation data and the appointment of Kevin Warsh as Federal Reserve chair, which reinforced expectations of a hawkish policy stance. This shift has led overseas institutional investors to reconsider the cost of hedging their dollar exposure. Data from Wells Fargo indicate that pension funds in Canada, the Netherlands and Denmark have scaled back hedging strategies adopted during last year’s volatility. Hedge ratios have fallen by about five percentage points at some Danish funds and roughly one percentage point at certain Canadian funds. The change has weakened the view that global investors were broadly exiting U.S. assets. Analysts note that some capital flows previously pressuring the dollar have reversed. Experts said long-term currency hedging has grown expensive and reduced returns, prompting many institutions to let hedges expire without renewal. Wells Fargo’s global head of FX strategy Erik Nelson stated that genuine investor flows supported last year’s hedging, but momentum has faded and the trend has reversed. A key factor is the widening interest-rate gap between the United States and other developed economies. Foreign investors typically hedge by selling dollars forward, yet the cost rises when U.S. rates exceed those at home. U.S. short-term rates remain about 140 basis points above euro zone levels, making hedging costly. Higher U.S. real rates have made American assets more attractive while raising the expense of currency protection, encouraging investors to leave more equity holdings unhedged. The shifting link between the dollar and U.S. equities has also lowered hedging urgency. During early 2025 market turmoil from tariffs, the dollar weakened alongside stocks rather than serving as a safe haven. It has since regained haven status, especially amid recent risk-off moves. Concerns over Federal Reserve independence have eased after the change in leadership, removing another drag on the currency. Lower FX hedging levels remove an obstacle to further dollar gains, as institutions generate fewer forward dollar sales. The dollar’s longer-term path will still hinge on U.S. economic strength and confidence in the AI-led investment boom. If enthusiasm for artificial intelligence investments fades or growth disappoints, institutions may reassess hedging. For now, higher U.S. rates, attractive yields and strong equity returns continue to support the dollar.
