Odd Lots Why The World Started Hedging Its US Dollar Exposure
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Oct 23, 2025 Hyun Song-Shin, an Economic Adviser at the Bank for International Settlements, shares insights on the shifting dynamics of the US dollar. He discusses the surprising 'triple decline' in April when stocks, bonds, and the dollar all fell. Hyun explains how institutional investors are using FX swaps to hedge against dollar exposure, revealing trends in hedging costs and the implications for long-term investor behavior. He also analyzes the roles of gold and emerging markets, noting that recent gains come from policy improvements rather than just a weaker dollar.
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April's Triple Decline Was Hedging, Not 'Sell America'
- The April triple decline (stocks, bonds, dollar) reflected ex-post hedging of dollar exposures rather than a wholesale sell-off of US assets.
- Investors bought hedges like FX swaps and sold dollars in spot and forward markets, driving downward dollar pressure.
How Investors Use FX Swaps To Hedge Dollar Risk
- Many long-term investors use FX swaps to hedge dollar exposure by borrowing dollars short-term and promising to reverse at a known rate.
- Hedge ratios fell recently because high hedging costs and a strong dollar disincentivized hedging.
Triennial Data Confirm Dollar Dominance
- The BIS triennial showed $9.6 trillion daily FX flows with the dollar on one side of 90% of trades, underscoring dollar dominance.
- FX swaps dominate, and increased spot and forward activity in April supports the ex-post hedging narrative.