After months of heavy hedging triggered by the tariff shock that rattled the dollar earlier this year, foreign investors who rushed to protect their U.S. holdings against further depreciation are now slowing those efforts sharply a vote of confidence that has helped the dollar rebound from its worst slump in years.

Analysts stress that hedging levels remain above historical norms, but activity has clearly retreated from the peak reached immediately after Liberation Day on April 2, when President Donald Trump announced sweeping trade tariffs.

At that time, foreign investors holding U.S. assets faced a double blow: falling equity and bond prices, and a sharp drop in the dollar. The fastest movers rushed to hedge against further currency losses, and many expected the wave to intensify. Instead, it faded allowing the dollar to stabilize.

David Lee, head of FX and emerging markets research at Nomura, said: Our conversations with clients now suggest that these hedging flows are less likely to come in as quickly as we anticipated back in May.

The dollar index which tracks the U.S. currency against major peers has climbed about 4% since late June, when it was down roughly 11% after its worst half-year since the early 1970s.

Because hedging data is sparse, analysts rely on broad indicators and reports from custodians and major banks.

Figures from BNY one of the worlds largest custodians show that clients entered 2025 strongly long U.S. assets, indicating little expectation of additional dollar weakness and limited urgency to hedge. That changed in April, pushing hedging above normal, though still below the highs of late 2023 when markets expected the Federal Reserve to begin rate cuts.

Dollar-diversification this year is talked about far more than it is actually implemented, said Geoffrey Yu, senior market strategist at BNY.

Other custodians report similar trends.

State Street Markets analysis of assets under custody shows foreign equity managers hedged 24% of their dollar exposure by the end of October up four percentage points since February but well below past levels that exceeded 30%. The firm also noted that hedging momentum slowed in recent weeks.

Differences appear across markets. A National Australia Bank survey of Australian pension funds found no significant change in hedging behavior toward U.S. equities. Meanwhile, data from Denmarks central bank shows pension-fund hedging stabilized after jumping in April.

William Davies, CIO of Columbia Threadneedle, said the firm initially moved quickly to hedge its U.S. equity exposure when the dollar slumped, but later pared those hedges, betting the currency would not fall much further.

No snowball effect

Hedging flows themselves move currencies adding hedges against a falling dollar requires selling the dollar, and removing hedges does the opposite.

If these flows coincide with shifts in interest rates, they can snowball into a self-reinforcing cycle that drives the currency lower.

Paul Mackel, head of FX research at HSBC, said: There was a belief earlier this year that a snowball effect might develop, but that ultimately didnt materialize.

It could happen next year, he added. But its not our base case.

Still, investor behavior may be shifting. BlackRock estimates that 38% of flows into U.S. equity ETFs listed in Europe, the Middle East, and Africa this year have gone into hedged products up from just 2% in 2024.

Costs, correlations, and complexity

Hedging costs are shaped by interest-rate differentials and often serve as a brake on hedging appetite.

Fan Luo, head of fixed income and currency solutions at Russell Investments, estimates Japanese investors pay roughly 3.7% annually to hedge against dollar weakness a steep cost.

If USD/JPY stayed flat for a year, a hedged investor would lose 3.7% versus an unhedged one. Euro-funded investors face a hedging cost of about 2%.

My rule of thumb for European investors is this: around 1% they dont care much 2% becomes meaningful, Luo said.

Asset correlations also matter. The dollar usually strengthens when equities fall, offering a natural hedge for foreign investors.

That didnt happen in April, fueling the hedging rush. This month, however, the dollar held steady even as equities dipped again.

Changing hedging policies can also be complicated for asset managers benchmarked to unhedged indices.

Fidelity International recommends European investors gradually raise hedging to 50% of their dollar exposure, but Salman Ahmed, head of macro and strategic asset allocation, says the process is extremely complex and may require changes in governance and benchmarks.

If rates move against the dollar and the currency weakens again making hedging cheaper pressure to shift strategies could increase.

There is still enormous potential for hedging of dollar-denominated assets, Nomuras David Lee said. But whether it happens and how fast remains an open question. Thats what the FX market is trying to figure out now.