The Bank for International Settlements published a Bulletin analysing why the US dollar weakened alongside equities and bonds after US tariff announcements in early April 2025. It argues that a key driver of the dollar’s depreciation in April and May was currency hedging by non-US investors seeking to reduce losses on previously unhedged US dollar exposures, rather than a broad-based loss of confidence in dollar assets. Non-US investors hold large US dollar portfolios, including roughly USD 17.6 trillion in US equities and USD 13.6 trillion in US bonds as of March 2025, and they account for sizable shares of outstanding US Treasury securities and agency and corporate bonds. The Bulletin notes that elevated short-term US dollar interest rates since 2022 increased hedging costs and, together with a strong dollar from 2021 to 2024, discouraged hedging and contributed to lower hedge ratios. When the dollar started to fall, some investors increased hedge ratios ex post using FX swaps and forwards, which can generate spot-market selling pressure. Evidence cited includes a more negative cross-currency basis for several Asian currencies and the euro in April and May, and intraday patterns showing that most of the dollar’s depreciation occurred during Asian trading hours while US Treasury prices rose, pointing to hedging activity by Asian investors rather than high-frequency selling of US government bonds. The Bulletin adds that the relative importance of hedging may diminish as a driver of the exchange rate as the US economic outlook after higher tariffs becomes more influential. It flags that FX hedge ratios and associated maturity mismatches warrant monitoring given the over-the-counter nature of FX swap markets, rollover risk, and the potential for stress in dollar funding markets.
Bank for International Settlements 2025-06-20
Bank for International Settlements research attributes the US dollar’s April 2025 slide partly to ex post FX hedging by non-US investors
The Bank for International Settlements published a Bulletin analyzing the US dollar's depreciation alongside equities and bonds following US tariff announcements in April 2025. The report attributes the dollar's decline primarily to currency hedging by non-US investors, not a broad loss of confidence in dollar assets. It highlights the impact of elevated short-term US dollar interest rates on hedging costs and notes potential stress in dollar funding markets due to FX hedge ratios and maturity mismatches.