ORLANDO, Florida, Nov 10 (Reuters) - The Trump

administration scored a surprise win-win this year, as Wall

Street boomed while the dollar fizzled. But a repeat next year

is unlikely as the root of that sweet spot, dollar hedging, may

be missing.

A weaker exchange rate is central to President Donald Trump

and Treasury Secretary Scott Bessent's vision of restoring the

might of U.S. manufacturing, increasing U.S. exports, and

narrowing the country's huge trade deficit.

The administration got its wish this year, with the dollar

index clocking its worst January-June period in more than half a

century, plunging as much as 12% at one point, while the S&P 500

shrugged off the 'Liberation Day' tariff chaos in April and

soared to new highs.

The key ingredient in this unusual mix was dollar hedging.

Overseas investors baulked at Trump's economic and foreign

policy agendas early into his second term in office, but they

still wanted exposure to the artificial intelligence-fueled

equity boom. So they hoovered up U.S. stocks, but hedged the

currency risk by selling the dollar via derivatives contracts.

PEAK HEDGING?

The dollar has been broadly steady since June, while Wall

Street has moved ever higher, suggesting there may still be

sufficient hedging activity capping the dollar's upside.

In fact, more than 80% of U.S. equity inflow from abroad is

now hedged, according to Deutsche Bank. If true, that suggests

there's not much scope to increase.

Of course, no official hedging data exists, nor any singular

method to measure it, resulting in a wide range of estimates,

with Deutsche Bank's approximation at the top end.

Strategists at JPMorgan reckon hedging demand has cooled in

recent months as the apocalyptic trade war fears of earlier this

year have faded and the dollar has stabilized.

They analyze net inflows into U.S. equity exchange-traded

funds domiciled abroad, assessing what percentage of this

capital goes to currency-hedged versus unhedged ETFs.

There has been steady demand for both from foreign investors

since July, but the flow in dollar terms has been significantly

skewed to the much-larger pool of unhedged ETFs.

ON THE WANE

How will hedging demand shape up next year? If the world's

view of the dollar and the U.S. darkens as it did early this

year, investors are likely to maintain high hedge ratios,

limiting the dollar's upside even if foreign buyers retain their

appetite for Big Tech-related equities.

On the other hand, the AI-driven 'U.S. exceptionalism'

narrative has re-emerged since mid-year. Just look at Nvidia's

recent $5 trillion valuation. If the U.S. economy outperforms

next year, foreign investors may have little reason to hedge at

all.

A Bank for International Settlements study in June concluded

that "the relative importance of hedging may wane as a driver"

for the dollar, and that the U.S. economic outlook is likely to

weigh more heavily in investors' minds moving forward.

POLICY PARADOX

How does this tie in with Trump's economic agenda? This is

where things get complicated.

While a softer greenback is at the core of Trump's policy,

it is also at odds with another administration goal for the

coming year - attracting a tidal wave of record investment from

overseas governments and corporations into the U.S. that Bessent

claims will lift Main Street and Wall Street in tandem.

"Trillions and trillions of dollars (are) being poured back

into our country by other countries and other places and

people," Trump told a business forum in Miami last week,

claiming that he has already secured $18 trillion in pledged

investment from abroad, which will allegedly rise to $21

trillion.

Even if these figures are heavily embellished, there remains

a fundamental inconsistency, for Main Street at least. Huge

capital inflows should, all else being equal, cause the dollar

to appreciate.

Hedging is a key reason why the dollar has weakened so much

this year even as investors ploughed cash into the U.S. stock

market. If this drag on the dollar is removed, but significant

capital inflows keep coming, the administration's 'America

First' industrial policy has a big problem.

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

columnist for Reuters)

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