After months of heavy hedging triggered by the tariff shock that rattled the dollar earlier this year, foreign investors who rushed to protect their U.S. holdings against further depreciation are now slowing those efforts sharply — a vote of confidence that has helped the dollar rebound from its worst slump in years.

Analysts stress that hedging levels remain above historical norms, but activity has clearly retreated from the peak reached immediately after “Liberation Day” on April 2, when President Donald Trump announced sweeping trade tariffs.

At that time, foreign investors holding U.S. assets faced a double blow: falling equity and bond prices, and a sharp drop in the dollar. The fastest movers rushed to hedge against further currency losses, and many expected the wave to intensify. Instead, it faded — allowing the dollar to stabilize.

David Lee, head of FX and emerging markets research at Nomura, said: “Our conversations with clients now suggest that these hedging flows are less likely to come in as quickly as we anticipated back in May.”

The dollar index — which tracks the U.S. currency against major peers — has climbed about 4% since late June, when it was down roughly 11% after its worst half-year since the early 1970s.

Because hedging data is sparse, analysts rely on broad indicators and reports from custodians and major banks.

Figures from BNY — one of the world’s largest custodians — show that clients entered 2025 strongly long U.S. assets, indicating little expectation of additional dollar weakness and limited urgency to hedge. That changed in April, pushing hedging above normal, though still below the highs of late 2023 when markets expected the Federal Reserve to begin rate cuts.

“Dollar-diversification this year is talked about far more than it is actually implemented,” said Geoffrey Yu, senior market strategist at BNY.

Other custodians report similar trends.

State Street Markets’ analysis of assets under custody shows foreign equity managers hedged 24% of their dollar exposure by the end of October — up four percentage points since February but well below past levels that exceeded 30%. The firm also noted that hedging momentum slowed in recent weeks.

Differences appear across markets. A National Australia Bank survey of Australian pension funds found “no significant change” in hedging behavior toward U.S. equities. Meanwhile, data from Denmark’s central bank shows pension-fund hedging stabilized after jumping in April.

William Davies, CIO of Columbia Threadneedle, said the firm initially moved quickly to hedge its U.S. equity exposure when the dollar slumped, but later pared those hedges, betting the currency would not fall much further.

No “snowball effect”

Hedging flows themselves move currencies — adding hedges against a falling dollar requires selling the dollar, and removing hedges does the opposite.

If these flows coincide with shifts in interest rates, they can snowball into a self-reinforcing cycle that drives the currency lower.

Paul Mackel, head of FX research at HSBC, said: “There was a belief earlier this year that a snowball effect might develop, but that ultimately didn’t materialize.”

“It could happen next year,” he added. “But it’s not our base case.”

Still, investor behavior may be shifting. BlackRock estimates that 38% of flows into U.S. equity ETFs listed in Europe, the Middle East, and Africa this year have gone into hedged products — up from just 2% in 2024.

Costs, correlations, and complexity

Hedging costs are shaped by interest-rate differentials and often serve as a brake on hedging appetite.

Fan Luo, head of fixed income and currency solutions at Russell Investments, estimates Japanese investors pay roughly 3.7% annually to hedge against dollar weakness — a steep cost.

If USD/JPY stayed flat for a year, a hedged investor would lose 3.7% versus an unhedged one. Euro-funded investors face a hedging cost of about 2%.

“My rule of thumb for European investors is this: around 1% they don’t care much — 2% becomes meaningful,” Luo said.

Asset correlations also matter. The dollar usually strengthens when equities fall, offering a natural hedge for foreign investors.

That didn’t happen in April, fueling the hedging rush. This month, however, the dollar held steady even as equities dipped again.

Changing hedging policies can also be complicated for asset managers benchmarked to unhedged indices.

Fidelity International recommends European investors gradually raise hedging to 50% of their dollar exposure, but Salman Ahmed, head of macro and strategic asset allocation, says the process is “extremely complex” and may require changes in governance and benchmarks.

If rates move against the dollar and the currency weakens again — making hedging cheaper — pressure to shift strategies could increase.

“There is still enormous potential for hedging of dollar-denominated assets,” Nomura’s David Lee said. “But whether it happens — and how fast — remains an open question.” “That’s what the FX market is trying to figure out now.”

Gold prices fell in European trading on Friday, extending losses for a second consecutive session and nearing a weekly decline, pressured by the strong performance of the US dollar in the foreign-exchange market amid fading expectations for a Federal Reserve rate cut in December.

Minutes from the Fed’s latest policy meeting reduced the likelihood of continued monetary easing, and investors are now awaiting key US sector data later today to reassess those expectations.

Price overview

•Gold today: spot gold fell 1.2% to 4,029.36 dollars, down from the opening level of 4,077.27 dollars, after hitting an intraday high of 4,088.83 dollars.

•On Thursday, gold settled down by less than 0.1%, marking its first loss in three sessions, weighed by a stronger US dollar.

Weekly performance

So far this week—ending with today’s settlement—gold prices are down roughly 1.5%, on track for a fourth weekly decline in five weeks.

US dollar

The dollar index traded on Friday near a two-week high, reflecting continued strength in the US currency and putting it on course for its largest weekly gain in six weeks.

Investors continue to favor the dollar as the most attractive asset at the moment amid mounting uncertainty over whether the Federal Reserve will proceed with a rate cut in December.

Federal Reserve

Minutes from the FOMC meeting on October 28–29, released Wednesday in Washington, showed that “many” policymakers opposed a rate cut at that meeting.

The minutes indicated that many participants believe the target range for the federal funds rate is likely to remain unchanged through year-end based on their economic projections.

However, some members noted that an additional cut in December “could be appropriate” if economic data evolves broadly in line with expectations ahead of the next meeting.

US interest rates

•Fed Vice Chair Philip Jefferson said Monday that the central bank needs to “proceed slowly” with any further rate reductions.

•Chicago Fed President Austan Goolsbee reiterated Thursday that he is “uncomfortable” with rushing into a rate cut, especially as progress toward the 2% inflation target has slowed and started to move “in the wrong direction.”

•Following the minutes and recent remarks, CME’s FedWatch tool showed rate-cut odds for December falling from 48% to 30%, with odds of no change rising from 52% to 70%.

•The delayed US nonfarm payrolls report—postponed due to the government shutdown—showed the economy added 119,000 jobs in September, more than double the expected 50,000.

•The stronger-than-expected jobs report reinforced expectations that the Fed will refrain from cutting rates in December.

•Investors now await key US economic releases later today, covering major “industrial–commercial” sector activity for November, to reassess the outlook.

Gold outlook

Brian Lan, managing director at Singapore-based GoldSilver Central, said gold is currently in a consolidation phase: the dollar has strengthened meaningfully, and uncertainty persists over whether the Fed will move ahead with additional rate cuts.

Lan added: “The market seems unsure, especially as we approach year-end. We expect many traders to lock in profits, and we’ve already seen that trend from late last week through this week.”

SPDR Gold Trust

Holdings at SPDR Gold Trust, the world’s largest gold-backed ETF, fell by 4.29 metric tons on Thursday, bringing total holdings down to 1,039.43 metric tons—the lowest level since November 11.

The euro rose in European trading on Friday against a basket of global currencies, attempting to recover from a two-week low against the US dollar as bargain-hunting emerged at lower levels. The move comes ahead of key economic releases in Europe covering activity in major sectors during November.

Despite the uptick, the single European currency is still heading for a weekly loss, as investors continue to favor the US dollar as the most attractive asset—especially after the likelihood of a Federal Reserve rate cut in December declined.

Price overview

•EUR/USD today: the euro rose more than 0.1% to 1.1542 dollars, up from the opening level of 1.1528 dollars, after touching a low of 1.1521 dollars.

•The euro ended Thursday down 0.1% against the dollar—its fifth straight daily loss—and hit a two-week low of 1.1502 dollars following stronger-than-expected US labor-market data.

Weekly performance

So far this week—ending with today’s settlement—the euro is down roughly 0.75% against the US dollar, on track for its first weekly loss in three weeks.

US dollar

The dollar index fell 0.1% on Friday, backing away from a two-week high of 100.36 and heading toward its first loss in six sessions, reflecting a pause in the US currency’s recent upward momentum against major and minor peers.

Beyond profit-taking, the dollar eased as investors refrained from building additional long positions ahead of key US sector data and further commentary from Federal Reserve officials.

More hawkish remarks from Fed policymakers, coupled with stronger-than-expected US job-creation figures for September, pushed down the odds of a December rate cut.

According to CME’s FedWatch tool, the market-implied probability of a 25-basis-point rate cut in December fell this week from 48% to 30%, while the probability of no change rose from 52% to 70%.

European rates

•Money-market pricing places the probability of a 25-basis-point ECB rate cut in December at roughly 25%.

•To reassess these expectations, investors are awaiting a series of key European sector data releases today, which will offer stronger evidence on the eurozone’s growth momentum heading into the fourth quarter.

Euro outlook

•At Economies.com, we expect that if incoming European data disappoints, the likelihood of an ECB rate cut in December will rise—placing additional downside pressure on the euro against a basket of currencies.

The Japanese yen rose in Asian trading on Friday against a basket of major and minor currencies, attempting to recover from its lowest level in ten months against the US dollar. The rebound was driven by bargain buying at lower levels and by data showing that Japan’s core inflation rose in October to its highest level in three months.

The figures signaled that underlying inflationary pressures remain firmly in place for the Bank of Japan, keeping alive the possibility of a rate hike in December.

The yen also received support from comments by Finance Minister Satsuki Katayama, who said that intervention in the foreign-exchange market remains an option in response to excessively volatile and speculative moves.

Despite Friday’s gains, the Japanese currency remains on track for a second straight weekly loss — and its worst week since July — as markets expect the new government led by Sanae Takaichi to unveil a large, low-rate stimulus package to support Japan’s weak economic activity.

Shortly afterward, the Japanese government announced a major economic stimulus package worth 135 billion dollars aimed at addressing rising prices, strengthening economic growth, and boosting defense and diplomatic capabilities.

Price overview

•USD/JPY today: the dollar fell about 0.25% to 157.08 yen, down from the opening level of 157.44 yen, after touching a high of 157.54 yen.

•The yen ended Thursday down 0.2% against the dollar — its fifth consecutive daily loss — and hit a ten-month low at 157.89 per dollar, weighed down by Takaichi’s stimulus plans.

Core inflation

Data released Friday in Tokyo showed Japan’s core consumer price index rising 3.0% in October, the fastest pace in three months and in line with market expectations. The index had risen 2.9% in September.

The figures highlight persistent inflationary pressure on BOJ policymakers, strengthening expectations for a rate hike in December.

Finance Minister Katayama

Finance Minister Satsuki Katayama said Friday that intervention in the FX market is possible to counter sharp and speculative moves, prompting traders to stay alert for potential yen-buying action from the authorities.

Weekly performance

So far this week — which ends with today’s settlement — the yen is down about 1.7% against the US dollar, on course for a second consecutive weekly loss and its worst weekly performance since July.

Large stimulus package

Japan’s Cabinet, led by Sanae Takaichi, approved an economic stimulus package worth 21 trillion yen (135 billion dollars) on Friday in the new leader’s first major policy initiative. Takaichi has pledged to pursue expansionary fiscal measures to support the country’s weak economy.

The package includes 17.7 trillion yen in general-account spending, far exceeding last year’s 13.9 trillion yen and marking the biggest stimulus since the COVID-19 pandemic. It also includes tax cuts totaling 2.7 trillion yen.

The government plans to approve a supplementary budget to fund the new stimulus on November 28, with the goal of securing parliamentary approval by year-end.

Kazuo Ueda

Bank of Japan Governor Kazuo Ueda told parliament on Friday that the BOJ must recognize that a weak yen can influence core inflation — a key gauge for timing rate hikes — by lifting import costs and pushing prices higher.

Ueda said the impact of currency moves on inflation may now be larger than in the past because companies have become more willing to raise prices and wages.

He added that the BOJ kept rates unchanged last month to allow “more time” to assess whether companies will continue raising wages in next year’s negotiations with labor unions.