Why the Dollar’s Slide is Reshaping Global Investment Tactics

In the midst of global market uncertainty, a shift in investor strategy is taking shape. Despite the U.S. stock market performing relatively well this year, the dollar is underperforming, losing ground against a basket of major currencies. 

While global stocks inch higher, the currency’s slide is causing alarm bells to ring. According to a financial analyst at Logirium, this surprising decline in the dollar, despite solid gains in U.S. equities and bonds, is largely attributed to an increase in hedging activity.

The Dollar’s Unlikely Decline

Historically, the U.S. dollar has been a cornerstone of global finance, offering a safe haven during market turbulence. But 2025 has painted a different picture. Despite Wall Street’s positive trajectory, the dollar has slipped around 10% this year. 

This unexpected decline has caught many investors off guard, especially since traditional correlations between the dollar, stocks, and bonds no longer seem to hold.

This shift has raised questions about how currency markets are responding to ongoing geopolitical tensions, U.S. policies, and changing investor sentiment. For investors, the dollar’s decline is not just a matter of exchange rates; it’s about protection and strategic realignment.

The Growing Hedge Trend

One of the primary factors behind the dollar’s decline is the surge in hedging by foreign investors. Historically, U.S. equity markets were viewed as a natural hedge against currency fluctuations. The logic was simple: as U.S. markets thrived, so would the dollar. But that narrative is fading.

Non-U.S. investors, especially those in Europe and Canada, are now hedging their dollar exposure more aggressively. Hedge ratios, the proportion of U.S. assets foreign investors cover with currency protection, are on the rise. 

For example, Danish pension funds recently saw their hedge ratio increase by 10 percentage points, marking the largest two-month rise in over a decade.

Sophia Drossos, an economist at Point72, explains that investors had previously embraced the U.S. economy’s “exceptionalism” and heavily invested in U.S. assets. However, now there’s a marked shift toward safeguarding against currency risks, as economic uncertainty continues to simmer.

The Ripple Effect on U.S. Assets

The ripple effect of rising hedging activity is being felt in U.S. assets, particularly in equities and Treasuries. As foreign investors increase their hedging activities, the dollar is weakening, which in turn, impacts U.S. stock and bond prices. This correlation breakdown between the dollar, stocks, and bonds has led to some unusual market dynamics.

Where traditionally the dollar and stocks moved in opposite directions, now they are showing a stronger correlation, with both dollar and stocks falling in tandem at times. For example, in 2025, when the S&P 500 has dipped, the dollar has fallen even more sharply. Conversely, as the stock market has ticked up, the dollar’s rebound has been sluggish.

This behavior has highlighted the growing uncertainty in the markets, with investors looking for a hedge as they adjust to global risks, including trade disputes, inflationary pressures, and unpredictable monetary policies.

A Closer Look at the Data

Let’s break down the numbers. As of March 2025, foreign investors held a massive $33 trillion in U.S. securities, with $18.4 trillion in equities and $14.6 trillion in debt instruments. This vast pool of U.S. assets is now being shielded with increased hedging activity, suggesting that the fear of currency devaluation is real.

The Ontario Teachers’ Pension Plan, a major foreign investor, reported a $6.9 billion foreign currency gain last year due to the dollar’s strength. However, if their hedge ratio has not adjusted, they are facing significant foreign currency losses as the dollar weakens.

What’s Next for the Dollar?

Despite the downturn, the dollar is far from dead. The ongoing global volatility presents opportunities for a dollar rebound. However, investors will likely remain cautious, with many continuing to hedge their dollar exposure as they ride out the uncertainty.

Morgan Stanley’s FX strategy team forecasts that even a modest rise in hedge ratios could trigger substantial foreign exchange flows, which will add pressure on the dollar. Until market conditions stabilize, expect the trend of hedging and dollar weakness to persist.

Conclusion: Navigating the Storm

As global investors adjust their strategies to account for the evolving risks in currency markets, the U.S. dollar’s downward slide offers both challenges and opportunities. Hedging, once a tool for protecting bond portfolios, has now become essential for safeguarding equity investments too.

While the dollar’s future remains uncertain, investors can still capitalize on U.S. assets by carefully monitoring hedging strategies. As a financial analyst at Logirium states, “The dollar’s decline may seem alarming now, but it is part of a larger, more nuanced shift in global investment strategies that could continue shaping the markets for the rest of 2025.”

Looking ahead, the key takeaway for investors is to remain vigilant, keep an eye on global currency hedging trends, and be prepared for volatility in both stock and bond markets.