A review of filings from pension funds and insurance companies worldwide reveals a striking pattern: investors with the largest holdings of US assets have minimal protection against a weakening dollar. Should market sentiment shift abruptly, the greenback could be exposed to significantly sharper downside.

Based on data from six markets where figures are available, as of June 30, investors in regions including Japan, Canada, and Taiwan had hedged only 41% of their foreign currency exposure — the lowest level since at least 2015. While this snapshot is incomplete, it offers insight into how the surge in hedging activity, triggered last year when President Trump's global tariff measures prompted investors to rush into dollar downside protection, has since subsided as the currency stabilized.

By reducing hedge ratios, investors are returning to a strategy that proved effective for most of the past decade-plus. Historically, the dollar tends to strengthen, or at least hold firm, during periods of heightened market volatility, meaning that dollar appreciation buffered losses on US equities and bonds when converted back into investors' domestic currencies. With the cost of currency hedging prohibitively expensive, investors have had little incentive to pay for protection.

The current risk is that both pillars underpinning this strategy — the high cost of hedging and the dollar's safe-haven status — are now under simultaneous strain. As investors re-engage with the so-called debasement trade, betting that US policies will erode the dollar's value, the currency has fallen roughly 2% this quarter and weakened against most G10 currencies.

Treasury Secretary Bessent's intervention to support the yen and curb the rise in US Treasury yields has amplified these concerns. Additionally, with President Trump pushing to lower borrowing costs, markets are questioning whether Federal Reserve Chair Kevin Warsh might raise interest rates to contain inflation. Currency hedging involves using derivatives to sell dollars and buy the investor's home currency as a safeguard against exchange-rate fluctuations. Given the substantial share of US assets in global portfolios, increasing hedge ratios effectively translates into more dollar selling.

Laura Cooper, macro credit head at Nuveen in London, which manages $1.4 trillion, noted that given the scale of foreign holdings of US assets, even modest shifts in positioning could move markets. "Foreign investors hold a significant volume of US assets, so even a minor adjustment in hedge ratios could generate considerable currency flows." Estimates suggest that across the six markets examined — representing roughly $4.6 trillion in foreign currency asset positions — a 5 percentage-point increase in hedge ratios would equate to approximately $230 billion in trading volume. The other three markets are Australia, Denmark, and Finland.

While this estimate excludes major markets such as the UK and the eurozone, the countries covered still represent a large portion of overseas holdings of US assets. Japan, the world's largest foreign holder of US Treasuries, accounts for about 10% of foreign ownership, with Canada and Taiwan also ranking among the top ten.