ORLANDO, Florida, Sept 16 (Reuters) - The rush to hedge

U.S. equity exposure this year was initially seen as part of a

broad 'de-dollarization' process, reflecting global investors'

discomfort with President Donald Trump's trade, economic and

foreign policy agendas. But, as the months go by and U.S. stocks

roar to fresh tech-fueled highs, this theory seems to be

crumbling.

If 'de-dollarization' were truly taking hold, U.S. stocks

and bonds would almost certainly be cheapening. And they're not.

Wall Street's indices - the S&P 500, Nasdaq, Dow and Russell

2000 - are at record highs, and Treasury bonds across the curve

are up this year. Even the 30-year bond.

However, unhedged overseas investors are currently sitting

on much smaller gains or nursing losses because the dollar index

is down 11% so far this year.

Hence the rush to hedge.

LIVING ON THE HEDGE

For the first time this decade, hedged inflows into U.S.

securities exceed unhedged inflows from abroad, according to

analysts at Deutsche Bank. Analyzing more than 500 funds, they

calculate that more than 80% of inflows into U.S. equities are

now currency-hedged, as are around 50% of flows into U.S. bonds.

This means that around two-thirds of total inflows into U.S.

assets are now hedged.

This represents a dramatic shift from years gone by,

especially in equities.

Hedging against further dollar downside suggests investors

want to protect their U.S. equity and fixed income holdings

rather than reduce them. Indeed, demand is holding up remarkably

well, given the stretched valuations in stocks and fiscal clouds

looming large over bonds.

When it comes to stocks, investors rarely hedged in the past

because of bets that a substantial decline on Wall Street would

usually coincide with a crisis and therefore be offset by a

safe-haven surge in the dollar.

But that's not how the 'Liberation Day' tariff turmoil in

April panned out.

"Foreigners may have returned to buying U.S. assets ... but

they don't want the dollar exposure that goes with it. For every

hedged dollar asset that is bought, an equivalent amount of

currency is sold to remove the FX risk," George Saravelos,

Deutsche's global head of FX research, wrote on Monday.

The last official U.S. Treasury figures for the end of June

2024 show that foreign ownership of U.S. stocks was a record

18%. Has that risen?

DOLLAR BEARS

The first half of the year was peppered with stories of

European and Canadian pension funds sharply raising their dollar

hedge ratios, fueling the 'de-dollarization' and 'end of U.S.

exceptionalism' narratives. In euro terms, the Nasdaq's 12% fall

in March was the index's worst month since 2002.

And the dollar is likely to remain under sustained selling

pressure, with interest rate and bond yield differentials moving

against it with the Federal Reserve almost certain to resume its

rate-cutting cycle this week, just as many peers are close to

ending theirs.

The currency could also end up bearing the brunt of

lingering investor concerns about the U.S. fiscal trajectory and

central bank independence.

Yet amid all this, the profitability and dynamism of Wall

Street, and the security and liquidity of Treasuries, continue

to attract capital from around the world. U.S. assets remain the

only game in town.

THE APRIL 8 TURNAROUND

Global stocks have been buoyant in 2025 too, with many

non-U.S. indices outperforming their U.S. counterparts this

year.

But since the 'Liberation Day' turmoil reached its peak on

April 8, U.S. stocks have roared back, with the Nasdaq - up

nearly 40% since then - one of the best performers.

Unsurprisingly, foreign investors don't want to miss out.

According to JP Morgan's equity strategists, foreign

investors are not interested in selling their U.S. holdings

regardless of current valuations, because growth opportunities

abroad are limited, liquidity outside the U.S. is relatively

poor, and they want to stay reasonably close to their

benchmarks.

"Most foreign investors continue to park their capital in

the U.S. for the long-term growth potential,

shareholder-friendly corporates, pro-growth policies, and the AI

story," they wrote last week.

All told, investors seem to be bearish the dollar but

bullish Wall Street and Big Tech in particular - a trend that

has confounded many experts who assumed 'de-dollarization' would

go well beyond the currency. It hasn't. And there's little

reason to believe this will change just yet.

(The opinions expressed here are those of the author, a

columnist for Reuters)