By Joseph Adinolfi
They still want to own U.S. stocks and bonds, but investors based outside the U.S. are increasingly hedging their exposure to the dollar, according to Deutsche Bank
Trend funds have struggled of late.
U.S. equity markets are finally seeing some stiff competition this year, as markets in Europe, China, South Korea and beyond have raced higher.
The U.S. was the undisputed leader during the first two years of this bull market, largely due to its dominance in the field of artificial intelligence. But since the start of 2025, indexes in other countries – from Germany’s DAX DX:DAX to Hong Kong’s Hang Seng HK:HSI to South Korea’s KOSPI Composite Index KR:180721 – have seen their outperformance widen.
Since Jan. 1, the S&P 500 SPX has gained 12.4%, according to FactSet data. The popular U.S. benchmark index was trading in record territory at 6,613 on Monday. But over the same period, South Korea’s KOSPI has gained 42%. The Hang Seng has risen by 31.8%, while Germany’s DAX is up 19.2%. When translated into U.S. dollar terms, their relative performance looks even more attractive.
Deutsche Bank’s George Saravelos has been carefully monitoring flows from foreign investors into U.S. markets all year, mostly by looking at investment funds focused on U.S. assets that happen to be based abroad.
His takeaway, shared with MarketWatch via email on Monday, is that while foreign investors have continued buying U.S. stocks and bonds, they are increasingly hedging their exposure to the U.S. dollar.
According to Saravelos, hedged flows into U.S. assets are outpacing unhedged flows for the first time this decade. That could help explain why the dollar hasn’t seen much of an appreciation, even as stocks have raced higher since the selloff in early April when President Donald Trump’s “liberation day” tariff plans sent the index to the brink of bear-market territory.
“The [currency] implications are clear: foreigners may have returned to buying U.S. assets … but they don’t want the dollar exposure that goes with it,” Saravelos said in commentary shared with MarketWatch.
Saravelos isn’t alone here. Others have also identified currency hedging as one of the biggest drivers of the U.S. dollar’s weakness so far in 2025. Based on the ICE U.S. Dollar Index DXY, the buck tallied its worst start to a calendar year since 1973. The index has fallen by more than 10% this year, according to FactSet data.
With the Federal Reserve expected to deliver a cut to its policy interest-rate target later this week, Saravelos said he doesn’t expect the pressure on the dollar to let up.
“The dollar is falling because the unhedged flow picture looks very weak. With the Fed about to start cutting rates while most other central banks are on hold, hedging dollar assets will only get cheaper,” he said.
-Joseph Adinolfi
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09-15-25 1144ET
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