For years, a quirk helped non US investors: when US stocks or longer Treasuries sold off, the dollar often strengthened. That negative relationship softened the blow when converting back to a home currency. The flip side was also true. In rallies, the stronger asset returns for Americans often felt a bit thinner abroad.
That cushion started fraying on 4 March 2025 when the United States announced a 10% hike in tariffs on China. It weakened further on 2 April after President Trump said he would seek reciprocal duties for other countries.
In the following two weeks, the S&P 500 lost 5% and the 10 year Treasury yield rose 20 basis points to 4.33%, implying roughly a 1.7% drop in price. Over that period, the dollar declined 3.5% versus the DXY basket.
DXY is built from a basket of six: the euro, pound sterling, Swiss franc, Canadian dollar, Swedish krona, and Japanese yen.
By 12 May, anxiety cooled after the US administration said some tariffs on China and Hong Kong would be put on hold. The old hedge only really returned toward late August 2025, and it looks less sturdy than before. In early 2026, tensions over Greenland coincided with a sharp jump in how tightly the dollar moved with US Treasuries. In the background, rolling 60 day correlations show why this matters: a more negative S&P 500 to dollar link typically softens losses via a stronger dollar.
If the triple hit to stocks, bonds and the dollar signaled a foreign exit, the numbers do not back that up. There was a brief dip in net inflows in April 2025, but it proved short lived.
US Treasury data show non resident net buying of Treasuries remained elevated, above the average pace seen from 2015 to 2024. Net foreign purchases of US equities were even stronger, well above the long run average by more than a standard deviation.
By the end of July 2025, non residents had a net USD 253 billion of US equity purchases, alongside USD 356 billion in Treasury bills. For comparison, the 2015 to 2024 averages were net sales of EUR -11 billion for equities and net purchases of USD 65 billion for bills.
What kept demand intact? High gross yields, the unmatched liquidity of the US bond market, and strong credit ratings continued to attract buyers. Stocks also had a solid 2025, with the S&P 500 repeatedly notching new highs, led by the Magnificent Seven benefiting from the AI boom.
Many investors also say there are not many compelling substitutes globally right now. Still, portfolio shifts take time. Rules and governance constraints slow big reallocations, so it is worth watching the data over a longer window to see if allocations truly shift.
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If the dollar's cushion thinned, foreign investors had another option. They could add currency hedges.
When the Fed started lifting rates in 2022, hedging dollar exposure was expensive, given higher short term US rates than in places like Germany and Japan, and the dollar itself was offering that natural offset. By early 2025, as that offset weakened, non US investors began layering on currency protection, often through FX swaps.
Pricing those swaps depends on interest rates and the cross currency basis - the premium or discount driven by supply and demand to hedge currency risk. A more negative basis means hedging against a weaker dollar costs more. Shortly after Liberation Day in April 2025, that basis sank to lows against the dollar for many currencies, signaling heavy demand for hedges from investors seeking to protect existing dollar exposures. Analysts estimate this hedging wave contributed significantly to the dollar's drop, consistent with a BIS described mechanism in 2025: sellers of dollar hedges manage their own risk by selling dollars in the spot market.
You can see it in concrete terms. On 9 April, a Japanese investor hedging a three month USD exposure had to pay a 35 basis point yield premium. At the start of 2026, that premium was roughly 15 to 20 basis points.
Investor disclosures tell the same story. Danish institutions - notably insurers and pension funds - boosted their hedge ratios on dollar assets after Liberation Day in April 2025, moving from around 60% in January to over 70% by December. Those Danish players, who publicly report exposures, represent about 9% of the assets managed by EU pension funds and insurers. In Finland, funds that manage roughly 7% of EU pension assets kept their hedge ratios fairly steady through 2025, and these were already elevated at the year's outset at about 70% across all currencies.
The pattern holds outside Europe. In a 16 September 2025 speech, Andrew Hauser, Deputy Governor of the Reserve Bank of Australia, noted that Australian superfunds lifted their hedge ratios during the second quarter of 2025 and likely will continue. Superfunds manage the equivalent of USD 2.8 trillion, and their annual reports suggest those hedge levels are indeed higher.
Here is the thread that ties this together. The dollar's natural hedge weakened after the tariff shock, steadied again by late August 2025, and looks less reliable than it used to be.
Foreign demand for US assets held up, with net buying of Treasuries and stocks above the 2015 to 2024 average by late July 2025. The twist was a clear rise in currency hedging starting in the first quarter of 2025, especially via FX swaps.
For anyone holding foreign exposure to US stocks or bonds, returns hinge on both market moves and the currency. When the old offset between the dollar and US risk assets loosens, swings get bigger, and the cost of hedging becomes a larger part of the story.
US assets still stand out in this snapshot, thanks to high gross Treasury yields, deep markets, strong credit ratings, and an equity market that found support in 2025. Even so, the tariff episode nudged global investors to reassess and strengthen currency hedging, both in the near term and with a longer horizon in mind.
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