In Singapore, as President Donald Trump's trade strategy impacts the U.S. dollar, investors with trillions of dollars in dollar-denominated assets are now looking for ways to secure the value of their investments. Despite the long-standing confidence in the dollar, only a small portion of the $33 trillion invested globally in U.S. markets is hedged against currency fluctuations.
Recent market volatility triggered by the U.S. President's trade policies has resulted in both the dollar and U.S. Treasuries losing their status as safe havens. Treasury yields have risen sharply, prompting investors to withdraw from both U.S. and foreign markets, leading to significant depreciation of the dollar against various currencies.
The decline in the dollar's value against major currencies is a cause for concern, representing the first time in almost two years that it has fallen below an index value of 100. The current economic landscape, including uncertainties surrounding immigration policies, tariffs, and a potential preference for a weaker dollar by the U.S. administration, poses a challenge for investors who have not hedged their investments against currency risks.
The U.S. market's prominence globally has been supported by the strength of the dollar. Although the U.S. economy contributes approximately 26% of the global GDP, Wall Street attracts more than a third of the world's equity investments. Foreign investors held $33 trillion in U.S. dollar-based assets by the end of 2024, with a significant portion allocated to debt securities.
While equity investors typically do not hedge their portfolios, bond investors, especially those in lower yielding markets, may find the currency fluctuations detrimental to their returns. As a result, they may be compelled to hedge their investments using derivative contracts to safeguard against further depreciation of the dollar.
Analysts anticipate a rise in hedging ratios due to the falling dollar, which could lead to significant selling of the U.S. currency. A small increase in the hedging ratio could result in billions of dollars being sold, highlighting the potential impact on currency markets if more investors decide to hedge their dollar-denominated investments.