US Dollar: Fed-driven hedge rebuilding revives selling pressure – BNY
BNY’s Geoff Yu argues that the July Fed meeting marked a peak in Dollar dehedging rather than an end to U.S. exceptionalism. Cross-border investors are rebuilding USD hedges, reducing effective unhedged U.S. exposure while maintaining broadly solid underlying demand for U.S. assets.
BNY’s Geoff Yu asserts that the Federal Reserve’s July meeting signified a peak in dollar dehedging rather than the conclusion of U.S. exceptionalism. Foreign investors are rebuilding U.S. dollar hedges, diminishing net U.S. asset exposure while preserving solid overall demand for U.S. assets. Dollar selling is primarily against the British Pound, Euro, and Canadian Dollar, with the Japanese Yen and Chinese Yuan serving as notable exceptions.
After the July 29 decision, net U.S. asset exposure plummeted from 0.47 to 0.34, indicating a significant shift in investor sentiment. The speed of this shift underscores the rapid re-engagement of investors with the dollar. Data also reveals that between July 29 and August 5, net U.S. asset exposure fell sharply, reinforcing the notion that U.S. exceptionalism remains robust.
However, the Fed's outlook continues to influence hedging levels, prompting the Fed to remain vigilant about foreign exchange impacts, especially if the dollar is increasingly perceived as an inflation conduit.
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