ORLANDO, Florida, June 9 (Reuters) - TRADING DAY

Making sense of the forces driving global markets

By Jamie McGeever, Markets Columnist

I'm excited to announce that I'm now part of Reuters Open

Interest (ROI), an essential new source for data-driven, expert

commentary on market and economic trends. You can find ROI on

the Reuters website, and you can follow us on LinkedIn and X.

Trade tensions, policy uncertainty and shaky economic data

continue to cloud the near-term outlook for world growth, but

they remain on the back burner for now as investors kick off the

week by pushing global stock markets higher.

In my column today I look at why the dollar has depreciated

significantly this year regardless of how U.S. stocks and bonds

have performed. The main reason? Hedging. More on that below,

but first, a roundup of the main market moves.

If you have more time to read, here are a few articles I

recommend to help you make sense of what happened in markets

today.

1. Defying debt warnings, Republicans push forward

on Trump

tax agenda

2. 'Blue' euro bonds to rival Treasuries?: Mike

Dolan

3. Japan to consider buying back some super-long

government

bonds, sources say

4. Wall Street, Main Street push for foreign tax

rethink in

U.S. budget bill

5. Auto companies 'in full panic' over rare-earths

bottleneck

Today's Key Market Moves

* World stocks set a new record high. The MSCI World index

rises

0.3% to 895.60 points.

* Wall Street closes in the green despite a flurry

of late

selling, and the S&P 500 nudges further above 6000 points. The

Russell 2000 small caps index rises most, up 0.6%.

* The dollar index slips 0.25%. But the biggest

decliner

in global FX on Monday is the Colombian peso, down 0.7% after

the assassination attempt on Senator Miguel Uribe, a potential

presidential contender.

* The U.S. yield curve bull steepens, snapping four sessions

of

flattening, with the 2- and 3-year yields down 4 bps. Next up, a

$58 billion auction of 3-year notes on Tuesday.

* Oil rises for a third day, with Brent crude

climbing 1%

above $67/bbl, its highest level since late April.

London calling, stocks crawling higher

It was a fairly quiet start to the week across global

markets on Monday, with strong equity gains in Asia followed by

a grind higher on Wall Street which lifted the MSCI World index

to a fresh record high. The main areas of focus for investors

were China's economic 'data dump' for May, then the high-level

U.S.-China trade talks in London.

The two are connected - the U.S. is a less important market

for China than it used to be, underscored in May's trade figures

from Beijing and reflected in the lack of concrete progress from

the negotiations in London.

China's total exports rose 4.8% in May from a year earlier

but this masks a huge split between the U.S. and the rest of the

world. Exports to the U.S. plunged 34.4% year-on-year in value

terms, the sharpest drop since February 2020 just before the

pandemic, while exports to the rest of the world rose 11.4%.

Monthly data are volatile, of course, and May's figures were

also distorted by tariffs. Still, U.S.-bound shipments worth

$28.8 billion last month were just 9% of the total $316 billion.

Economist Phil Suttle notes that is less than half the average

share in the decade leading up to President Donald Trump's first

trade war.

The London talks are expected to continue on Tuesday. But as

was the case following Trump's telephone call with Chinese

leader Xi Jinping on Thursday, there is little indication of a

significant breakthrough, far less China bending to U.S.

demands.

"U.S. Treasury Secretaries who live in unbalanced

economies might not want to throw barbs such as the 'most

unbalanced in modern history' at China without first looking at

some data," Suttle wrote on Monday.

"The choice to fight an opponent should be conditioned on a

clear-headed view of its strengths and weaknesses. The U.S. has

done a marvelous job of (once again) deluding itself on this

front," Suttle added.

Still, divisions between the two countries and the threat to

global supply chains are proving no barrier to rising stock

markets. Japan's Nikkei and the MSCI emerging and Asia ex-Japan

indexes rose around 1%, Hong Kong-listed tech stocks rose nearly

3%, and Wall Street closed in the green.

Meanwhile, the dollar's trend this year of declining despite

U.S. stocks and bonds rising was on full display on Monday. Wall

Street closed slightly higher and Treasury yields fell as much

as 5 basis points at the short end of the curve, yet the dollar

slipped. Many analysts say one of the main reasons for this is

non-U.S. investor hedging - more on that below.

Dollar floored as investors seek that extra hedge

All three major U.S. asset classes - stocks, bonds and the

currency - have had a turbulent 2025 thus far, but only one has

failed to weather the storm: the dollar. Hedging may be a major

reason why.

Wall Street's three main indices and the ICE BofA U.S.

Treasury index are all slightly higher for the year to date,

despite the post-'Liberation Day' volatility, while the dollar

has steadily ground lower, losing around 10% of its value

against a basket of major currencies and breaking long-standing

correlations along the way.

The dollar was perhaps primed for a fall. It's easy to

forget, but only a few months ago the 'U.S. exceptionalism'

narrative was alive and well, and the dollar scaling heights

rarely seen in the past two decades.

But that narrative has evaporated, as U.S. President Donald

Trump's controversial economic policies and isolationist posture

on the global stage have made investors reconsider their

exposure to U.S. assets.

But why is the dollar feeling the burn more than stocks or

bonds?

PENSION FUND-AMENTALS

Non-U.S. investors often protect themselves against sharp

currency fluctuations via the forward, futures or options

markets. The difference now is that the risk premium being built

into U.S. assets is pushing them - especially equity holders -

to hedge their dollar exposure more than they have in the past.

Foreign investors have long hedged their bond exposure, with

dollar hedge ratios traditionally around 70% to 100%, according

to Morgan Stanley, as currency moves can easily wipe out modest

bond returns.

But non-U.S. equity investors have been much more loath to

pay for protection, with dollar hedge ratios averaging between

10% and 30%. This is partly because the dollar was traditionally

seen as a 'natural' hedge against stock market exposure, as it

would typically rise in 'risk off' periods when stocks fell. The

dollar would also normally appreciate when the U.S. economy and

markets were thriving - the so-called 'Dollar Smile' - giving an

additional boost to U.S. equity returns in good times.

A good barometer of global 'real money' investors' view on

the dollar is how willing foreign pension and insurance funds

are to hedge their dollar-denominated assets. Recent data on

Danish funds' currency hedging is revealing.

Danish funds' U.S. asset hedge ratio surged to around 75%

from around 65% between February and April. According to

Deutsche Bank analysts, that 10 percentage point rise is the

largest two-month increase in over a decade.

Anecdotal evidence suggests similar shifts are taking place

across Scandinavia, the euro zone and Canada, regions where

dollar exposure is also high.

The $266 billion Ontario Teachers' Pension Plan reported a

$6.9 billion foreign currency gain last year, mainly due to the

stronger dollar. Unless the fund has increased its hedging ratio

this year, it will be sitting on huge foreign currency losses.

"Investors had embraced U.S. exceptionalism and were

overweight U.S. assets. But now, investors are increasing their

hedging," says Sophia Drossos, economist and strategist at the

hedge fund Point72.

And there is a lot of dollar exposure to hedge. At the end

of March foreign investors held $33 trillion of U.S. securities,

with $18.4 trillion in equities and $14.6 trillion in debt

instruments.

RIDING OUT THE STORM

The dollar's malaise has upended its traditional

relationships with stocks and bonds. Its generally negative

correlation with stocks has reversed, as has the usually

positive correlation with bonds. The divergence with Treasuries

has gained more attention, with the dollar diving as yields have

risen. But as Deutsche Bank's George Saravelos notes, the

correlation breakdown with stocks is "very unusual".

When Wall Street has fallen this year the dollar has fallen

too, but at a much faster pace. And when Wall Street has risen

the dollar has also bounced, but only slightly. This has led to

the strongest positive correlation between the dollar and S&P

500 in years, though that's a bit deceptive, as the dollar is

sharply down on the year while stocks are mildly stronger.

Of course, what we could be seeing is simply a rebalancing.

Saravelos estimates that global fixed income and equity

managers' dollar exposure was at near record-high levels in the

run-up to the recent trade war. This was a "cyclical" phenomenon

over the last couple of years rather than a deep-rooted

structural one based on fundamentals, meaning it could be

reversed relatively quickly.

But, regardless, the dollar's hedging headwind seems likely

to persist.

"Given the size of foreign holdings of both stocks and

bonds, even a modest uptick in hedge ratios could prove a

considerable FX flow," Morgan Stanley's FX strategy team wrote

last month. "As long as uncertainty and volatility persist, we

think that hedge ratios are likely to rise as investors ride out

the storm."

What could move markets tomorrow?

* South Korea current account (April)

* UK BRC retail sales (May)

* UK employment (April)

* Brazil inflation (May)

* U.S. 3-year Treasury note auction

Opinions expressed are those of the author. They do not

reflect the views of Reuters News, which, under the Trust

Principles, is committed to integrity, independence, and freedom

from bias.