Canadian, Dutch, and Danish funds let their dollar protection roll off as US rates climb
Canadian, Dutch, and Danish pension funds are unwinding the US dollar hedges they added last year, a reversal that is helping sustain the American currency through 2026 and eating into a briefly popular thesis that global investors were abandoning the greenback.
The retreat shows up in falling hedge ratios, which measure how much of a fund's dollar exposure is shielded from currency swings.
Those ratios have dropped 5 percentage points over the past year at some Danish funds and by a percentage point at some Canadian funds, according to a Wells Fargo analysis of foreign-exchange hedge ratios reported by Reuters.
The funds had ramped up dollar hedging in 2025 following the market turmoil that came with US President Donald Trump's "Liberation Day" tariffs.
Erik Nelson, global head of FX strategy at Wells Fargo, told Reuters the earlier move away from the dollar was real, not just talk.
He said "genuine flows" sat behind the so-called sell America trade, driven partly by pension funds' hedging.
That hedging has since eased, he said, and the trends have reversed.
Rising inflation readings and the appointment of Kevin Warsh as Fed chair have pushed up US real, or inflation-adjusted, interest rates in recent months, Reuters reported, and higher rates make hedging more expensive.
Foreign investors hedge currency risk by selling dollars forward, and because the cost of that hedge is tied to the interest rate gap between the US and an investor's home country, wider US rate premiums cut into net returns.
With US short-term rates sitting roughly 140 basis points above the euro zone's, hedging remains costly for many funds abroad.
That trade-off is prompting large investors to leave more exposure open.
Garth Appelt, head of FX and emerging markets derivatives at Mizuho Americas, said higher US real interest rates pull investors toward the dollar while pushing up hedging costs.
That trade-off has led big investors to leave "more of their US stock holdings unhedged," he said.
Much of the unwinding is happening quietly.
Karl Schamotta, chief market strategist at payments company Corpay in Toronto, said a similar dynamic appears to be unfolding among other real-money investors, with positions rolling off "mostly passively, as firms let hedges roll off without replacement."
Comprehensive hedging data remain scarce, he noted.
The backdrop explains why funds piled into hedges in the first place.
Markets were rattled in early 2025 when the dollar failed to act as a safe haven and fell alongside US equities, hitting foreign investors with heavy US stock exposure twice over.
"People were losing double the amount on a position that had previously worked for the prior decade as a perfect hedge," Alex Moloney, head of macro discretionary, currency solutions at Insight Investment, told Reuters.
The currency also weakened last year as investors worried about Fed independence during Trump's attacks on then chair Jerome Powell, concerns that have eased since Warsh took over.
This year, the dollar has regained its haven role, Reuters reported, notably during the risk-off period following the US-Iran conflict.
For pension investors weighing whether to rebuild hedges, the lighter hedging flows now cut the other way.
Their absence is likely to provide "a marginal dollar support going forward," Moloney said.
Analysts cautioned that the dollar's path still hinges on the US artificial intelligence investment story that continues to draw international capital, as per Reuters.
Should those expectations prove too optimistic and US growth falter, funds may revisit their hedging needs.
Dollar rates, dollar carry and dollar equity returns remain high, Nelson said, and the setup favours the currency for now.
Until that shifts, he said, "we're still in a generally strong dollar world."
