Published on Feb 28, 2026
This article was written by Adem Tumerkan
Content Editor, Dunham | 2025 ThinkAdvisor Luminary Award Winner | 2026 Wealthies Finalist — Thought Leader of the Year | Macroeconomics, markets, geopolitics & global trends
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For years, it was a winning formula for foreign institutions:
For years, investing in U.S. assets was one of the easiest trades in global finance.
Foreign institutions - pension funds in Paris, sovereign wealth funds in Riyadh, insurers in Tokyo — would convert their local currency into U.S. dollars, buy American stocks and bonds, and watch the returns roll in. And as the dollar strengthened, those returns got even better.
It was a winning formula. That is, until the trade war broke out.
Since 2025 started, U.S. equities have been slipping and lagging international markets. The dollar is softening. And what once amplified gains is now doubling the pain - hitting foreign investors from two directions at once.
But here's what's really unsettling markets.
It's not just the losses. It's the speed of the unraveling. And the uncertainty that shows no sign of letting up.
These institutions counted on the U.S. as a safe haven. Now they're being forced to rethink playbooks that worked for over a decade - and fast.
At the center of it all is a complex - yet critical - concept with enormous consequences: the coming cycle of currency hedging.
With over held by foreign institutions - much of it unhedged - the stakes couldn't be higher. When these financial whales start to move, they don't just splash. They pull the ocean with them.
Let's break down what's happening, why it matters, and who's most caught with their pant down.
Here's how it works in simple terms. . .
Say you're a European pension fund investing in U.S. stocks.
To buy those assets, you first convert euros into U.S. dollars.
If the dollar strengthens while you're invested, that's great - because when you convert your gains back to euros, you get even more back.
But if the dollar weakens? Well, your returns get smacked down, even if the underlying stock performed well.
That's where a currency hedge comes in. It locks in today's exchange rate to protect against nasty currency swings down the road.
Think of it like insurance. It doesn't boost profits - it preserves them. It removes one dangerous variable from an already complex financial equation.
But there's a catch.
Hedging isn’t free. And for years, many institutions decided it wasn’t worth the cost and instead focused on “un-hedging”.
That decision is now coming back to haunt them.
For much of the past decade, going unhedged made sense. U.S. markets boomed. The dollar held strong. And there was an unspoken safety net built into the trade.
This was known as the "USD smile" - aka the pattern where the dollar tends to rally during both periods of U.S. economic strength and global crises.
Here's how it played out historically:
Thus, this implicit safety net made formal hedging feel unnecessary.
Or said another way, holding dollar assets was the hedge itself.
But lately, things may have broken that pattern.
Trade wars have scrambled the traditional correlations. And dollar strength isn’t a shoo-in anymore.
Now, we're seeing periods where stocks fall, bonds fall, and the dollar falls - a brutal trifecta for unhedged foreign investors.
Said another way, the old assumptions are broken. And the institutions that relied on them are paying the price.
Keep in mind these I'm not talking about small retail traders reacting to headlines.
I’m talking about institutional giants - think pension funds, sovereign wealth funds, insurers, and global asset managers - that manage more than $30 trillion in U.S.-dollar-denominated assets (as of June 2024)2.
To put that in perspective - in 2009, that number was under $10 trillion. It has more than tripled in 15 years, with a massive portion of it unhedged.
These are the financial whales of global markets. They're massive. They move slowly. And when they change direction, the whole ocean feels it.
Right now, they're feeling the sting of years spent betting on U.S. stocks and a strong dollar - a bet that's no longer paying off the way it used to.
And a falling dollar isn't just cutting into returns.
For many of these institutions, it's threatening their ability to meet long-term funding obligations.
Imagine you're a major German pension fund managing over €700 billion in assets. Your mandate is clear - generate a steady 8-10% annual returns to pay retirees.
Unfortunately, German stocks haven't delivered those types of returns in many years (Germany's markets were essentially flat between 2015-2021). So instead, you look to the U.S. - the world's best-performing equity market over the past decade.
But here's the problem.
To invest in U.S. stocks, you have to convert euros into dollars. And when it's time to pay those German retirees, you need euros - not dollars.
That's where currency risk enters the picture.
Walk through this scenario:
That German pension fund doesn't lose 6%. In euro terms, they lose 11%.
That's not a rounding error. That's years of carefully generated returns wiped out in a single downturn — with real consequences for the retirees counting on that money.
Now multiply that scenario across trillions of dollars in global assets. The systemic risk becomes clear very quickly.
Wall Street has already started to notice this trend.
And if hedging ratios begin to normalize back toward historical levels, analysts estimate we could see over $5 trillion in additional dollar exposure get hedged. That's a tidal wave of demand hitting FX markets — driving up the cost of forwards, options, and FX contracts almost simultaneously.
That kind of move could:
Put simply, it's a potential market earthquake that's playing out in slow motion.
Just because the risk is rising doesn’t mean hedging is easy. For example:
That’s a pretty big drag on returns - especially in a low-yield world as interest rates come down. Meanwhile, as volatility spikes, the cost of options-based hedging gets even worse.
So now these institutions are caught between two rough choices:
Neither option is perfect. But one thing is clear - doing nothing is no longer an option.
You might be thinking - "so institutions make a little less on their hedges. Is this really a systemic issue?"
It is. And here's why.
When $30 trillion in capital starts repositioning, it doesn't stay contained to currency desks. The ripple effects move through every layer of global finance:
Thus, the "dollar as safe haven" narrative - one of the most deeply held assumptions in global finance - is being rewritten in front of our eyes.
So, as these financial whales react, the aftershocks could greatly affect global markets - from FX desks in Frankfurt to pension funds in Tokyo.
We're entering a new phase of global finance — one where currency risk, long dismissed as a technical footnote, is coming back with a vengeance.
The falling U.S. dollar isn't just an FX story. It's forcing a fundamental rethink of how trillions of dollars in global capital are allocated, protected, and repositioned.
The institutions driving this shift move slowly. But they move with enormous force.
When these whales change direction, they don't just splash.
They pull the ocean with them.
Why is the U.S. dollar falling right now?
Because the story’s changing. Slower U.S. growth, cooling rate hike expectations, ballooning deficits, and a shift in global capital flows are all weighing on the dollar. The old "safe-haven" playbook isn’t holding up like it used to.
What exactly is a currency hedge — and why now?
A currency hedge locks in the current exchange rate to avoid getting whipsawed later. It doesn’t boost profits — it preserves them. And in a world where both the dollar and equities are sliding, protecting downside matters more than ever.
Who’s feeling the pain the most?
Big institutions. Think: European pensions, Japanese insurers, Middle East sovereign wealth funds. Collectively, they hold over $30 trillion in dollar-denominated assets — and most of it is unhedged. When the dollar drops, they bleed.
How under-hedged are we talking?
Right now, just 23% of foreign-held U.S. exposure is hedged. That’s less than half of what it was before the pandemic. If this shifts back to historical norms, we could see over $5 trillion in FX repositioning. That’s not a ripple — that’s a wave.
What happens if everyone starts hedging at once?
You get a storm in FX markets. Hedging costs spike. Volatility climbs. Currency values shift. Exporters feel the squeeze. And risk starts to get repriced globally. This isn’t just a back-office currency story — it’s a capital flow earthquake in slow motion.
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance. All examples are hypothetical and are for illustrative purposes only.
Information contained in the materials included is believed to be from reliable sources, but no representations or guarantees are made as to the accuracy or completeness of information. This document is provided for information purposes only and should not be considered as investment advice.
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