（Singapore, 03.09.2026）The US dollar could face a fresh wave of selling as some of the world’s biggest investors reconsider how much currency risk they are willing to carry, with unusually low hedging levels leaving global portfolios more exposed to further declines in the greenback.
Pension funds and insurers across Japan, Canada, Taiwan and several other major markets had hedged only 41% of their foreign-currency exposure as of the end of June, the lowest level since at least 2015, according to Bloomberg calculations based on data from six markets. The figures cover about US$4.6 trillion in foreign-currency holdings and suggest that even a modest change in hedging behaviour could generate substantial flows in the currency market.
For much of the past decade, leaving US investments largely unhedged made sense because the dollar often strengthened during periods of market stress, helping cushion losses on American stocks and bonds when they were converted back into investors’ domestic currencies. Hedging was also expensive because US interest rates were considerably higher than those in many other developed economies.
Both assumptions are now being challenged as the dollar weakens and the cost of protecting against currency swings falls, potentially encouraging overseas investors to rebuild hedges without necessarily reducing their holdings of US assets.
The dollar has fallen about 2% this quarter and weakened against most of its Group-of-10 peers as investors revive what markets have dubbed the “dollar debasement trade”, driven by concerns that US fiscal and monetary policies could gradually undermine the currency’s value.
Recent moves by US Treasury Secretary Scott Bessent to support the yen and contain rising Treasury yields have added to those concerns, while uncertainty over Federal Reserve Chair Kevin Warsh’s willingness to raise interest rates aggressively to tackle inflation has complicated the outlook. Warsh signalled at Jackson Hole that controlling price pressures remained a priority, but investors are also weighing President Donald Trump’s push for lower borrowing costs ahead of the US midterm elections.
The consequences could be significant because increasing a currency hedge generally involves selling dollars forward against an investor’s home currency. With foreign investors holding enormous amounts of US stocks and bonds, relatively small adjustments can translate into substantial dollar selling.
A five-percentage-point increase in hedge ratios across the six markets analysed by Bloomberg, which also include Australia, Denmark and Finland, could generate roughly US$230 billion of currency transactions. The calculation excludes large investment markets such as the UK and euro area, meaning the potential global impact could be considerably broader.
“Given the scale of foreign holdings of US assets, it doesn’t take a dramatic change in positioning to matter,” Laura Cooper, head of macro credit at Nuveen, which oversees US$1.4 trillion, told Bloomberg. Even small changes in hedge ratios, she said, could generate meaningful foreign-exchange flows.
The economics of hedging are also becoming more attractive as interest-rate gaps narrow, with the three-month cost of hedging dollars for yen-based investors falling to a four-year low of 2.75%, compared with as much as 6% in October 2023. For euro-based investors, the cost has dropped to a two-year low of 1.32%.
Inflation pressures from the Iran war and higher energy prices are meanwhile pushing central banks elsewhere toward tighter monetary policy, further narrowing rate differentials with the US. If markets reduce expectations for Federal Reserve rate increases, investors could have another incentive to add protection against dollar weakness.
Japan may be particularly important because it is the world’s largest foreign holder of US Treasuries, accounting for about 10% of overseas holdings. Deutsche Bank estimates Japanese investors hedged 41% of new foreign bond purchases during the first half of 2026, down sharply from 62% in 2024.
Shoki Omori, Deutsche Bank’s chief fixed-income strategist for Japan, said the last time hedging was similarly low was in 2013, just as the dollar was beginning a decade-long bull market, but today’s economic environment looks closer to the opposite. Further Bank of Japan rate increases, a sharper dollar decline or new solvency requirements for insurers could all encourage Japanese institutions to increase their protection.
The changing outlook does not necessarily mean overseas investors will abandon US markets, as they can continue holding Treasuries and American equities while separately selling dollars through derivatives. That distinction could allow demand for US assets to remain relatively resilient even if the currency comes under greater pressure.
Singapore Dollar Emerges as a Potential Winner
One Asian currency already benefiting from the shift is the Singapore dollar, which has developed the strongest inverse relationship with the US currency in the region. Its 120-day correlation with the greenback has fallen to minus 0.94, the most negative since May 2024, indicating that the two currencies have recently been moving in almost opposite directions.
The Singapore dollar has gained 1.8% this quarter, outperforming its Southeast Asian peers, supported not only by US dollar weakness but also by Singapore’s economic strength and tighter monetary policy.
The Monetary Authority of Singapore tightened policy for a second consecutive review in July by increasing the pace at which it allows the Singapore dollar’s trade-weighted exchange rate to appreciate. The move came as the government raised its 2026 economic growth forecast to between 4.5% and 5.5%, up from the 2% to 4% range projected in February.
Singapore’s strong fiscal position, AAA sovereign credit ratings and measures aimed at attracting international capital are also strengthening its appeal as investors look for alternatives. The government recently proposed potentially lucrative tax exemptions for individual fund managers as part of efforts to compete with other major asset-management centres.
ANZ expects the Singapore dollar to strengthen to S$1.26 against the US dollar by the end of 2026, compared with around S$1.27 on Thursday.
The dollar’s next moves could therefore depend increasingly on whether global investors continue to regard it as the natural refuge during periods of market stress. Any sustained deterioration in that perception, combined with cheaper hedging costs, could prompt pension funds, insurers and other large institutions to increase currency protection, adding another source of dollar selling even if they continue investing heavily in US markets.
