Several large international pension funds that moved to hedge dollar exposure after last year’s market disruptions have started to pare back those hedges, a trend that is easing a recent source of selling pressure on the U.S. dollar.
Analysts point to higher U.S. real - or inflation-adjusted - interest rates, and the change in the Federal Reserve’s leadership to Kevin Warsh, as key factors that have supported the dollar. A Wells Fargo analysis of FX hedge ratios shows that some Canadian, Dutch and Danish pension funds have retraced parts of the hedging steps they took after the market volatility tied to last year’s so-called "Liberation Day."
There are limited comprehensive hedging data, but market observers say similar behavior appears across other large, long-term investors. "Because long-duration hedging can be expensive and cut into returns, some of that increase is now being unwound - mostly passively, as firms let hedges roll off without replacement," said Karl Schamotta, chief market strategist at payments company Corpay in Toronto.
Hedge ratios - the metric that shows what share of a fund’s dollar exposure is shielded from currency swings - have dropped by as much as 5 percentage points over a year at some Danish funds and by around 1 percentage point at some Canadian funds, according to the Wells Fargo analysis. Erik Nelson, global head of FX strategy at Wells Fargo, said that the earlier move to hedge was not entirely speculative: "Sell America wasn't all hype ... there were some genuine flows behind it," referring to the wave of hedging activity among global pension schemes.
Why funds are easing off hedges
Higher U.S. short-term interest rates have made hedging dollar exposure more costly. Foreign investors typically hedge FX risk by selling dollars forward, and the cost of such hedges is linked to the interest-rate differential between the United States and the investor’s home market. With U.S. short-term rates roughly 140 basis points above the euro zone’s, hedging dollar positions remains an expensive proposition for many overseas investors.
Garth Appelt, head of FX & emerging markets derivatives at Mizuho Americas, summarized the trade-offs: "Higher U.S. real interest rates make dollar investments more attractive, but also make currency hedging more expensive, so big investors have chosen to leave more of their U.S. stock holdings unhedged."
Another factor shaping decisions is the dollar’s recent shift in behavior versus U.S. equities. In early 2025, markets were rocked after the imposition of global tariffs on "Liberation Day," and the dollar did not act as a safe-haven currency as it had in prior periods. Instead, it fell alongside U.S. stocks, worsening losses for foreign investors owning U.S. equities. "People were losing double the amount on a position that had previously worked for the prior decade as a perfect hedge," said Alex Moloney, head of macro discretionary, currency solutions at Insight Investment.
How the reversal affects the dollar
As pension funds step back from active dollar hedging, the removal of those selling flows on the forward market acts as a marginal support for the greenback. Alex Moloney characterized the change this way: where hedging flows had been a headwind for the dollar, "the absence of those flows is likely to act as a marginal dollar support going forward."
Market sentiment toward Fed independence and leadership also plays a role. The dollar came under pressure when investors were concerned about the Fed's autonomy amid political attacks on then-Chair Jerome Powell. Those pressures have subsided since Kevin Warsh assumed the central bank’s leadership, removing one element of dollar weakness.
That said, observers underscore that the dollar’s path will still hinge on the ongoing performance of the U.S. investment story, notably the strong draw of AI-related investments. If the expectations around the health of that investment trend were to prove too optimistic and U.S. growth disappoints, funds could reassess hedging needs and return to higher levels of protection. The article’s sources do not present new data or timelines for such a shift, only that it remains a possible consideration for investors.
Bottom line
The combined effect of higher U.S. real rates, more expensive hedging costs, the Fed leadership change, and the dollar’s renewed safe-haven episodes has diminished the impetus for some large pension funds to maintain elevated forward-dollar hedges. With fewer hedging-driven dollar sales, the currency has found firmer footing. "You’re still in a situation where the dollar rates, dollar carry, and dollar equity returns are high," Nelson said. "So until that changes, we're still in a generally strong dollar world."
While the withdrawal of hedges is not universal and comprehensive hedging data remain scarce, multiple market participants see the partial unwind as an important supporting factor for the dollar amid other prevailing forces.