Deutsche Bank’s analysis of exchange-traded funds (ETFs) shows that overseas investors are cutting their dollar exposure at an “unprecedented pace” when purchasing US stocks and bonds by taking currency hedging measures.
George Saravelos, the global head of currency research at the bank, wrote in a report released on Monday, citing data from more than 500 funds, that for the first time this century, more money has flowed into dollar-hedged ETFs that buy US assets than into unhedged funds.
In Saravelos’ view, this hedging behavior explains why the dollar remained weak even after international investors again poured money into US assets earlier this year, despite President Donald Trump’s tariff measures disrupting the market. At that time, it was widely speculated that the trade war might undermine investors’ confidence in US stocks, bonds and the dollar.
The impact on foreign exchange is obvious: foreigners may have resumed buying US assets (though as we wrote last week, at a slower pace), but they don’t want the accompanying dollar exposure, Saravelos wrote. “For every dollar asset bought with a hedge, an equal amount of dollars is sold to eliminate the foreign exchange risk.”
Saravelos said that dollar-hedged funds accounted for over 80% of the total inflows into US equity ETFs and 50% of the total inflows into US fixed-income market ETFs.
The Bloomberg Dollar Spot Index has plunged by about 9% this year and is now close to its 2025 low. Meanwhile, according to the US Treasury Department, foreign investors’ holdings of US stocks and bonds, which declined from February to April, soared to a record high in June.
Saravelos wrote: “The dollar is falling because the un-hedged capital flow situation looks very weak.”
Saravelos said that for overseas fund managers, as the market generally expects the Federal Reserve to resume cutting interest rates this week, the cost of hedging dollar assets will become cheaper.
Given the signs of weakness in the US job market, traders expect the Federal Reserve to cut borrowing costs for the first time this year on Wednesday and to continue a series of rate cuts throughout next year.
Technical analysis:
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Gold: Yesterday, our plugin alerted us to buy limit in the green zone and buy stop in the blue zone, achieving profit-to-loss ratios of 5 times and 8 times respectively. Given the significant profit made yesterday, it is recommended to reduce positions and focus on protection. Today, we will continue to focus on shallow sweeps for liquidity and breakouts for buying. For detailed positions, please consult the plugin.
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The Nasdaq index: After breaking through the key resistance at 24,140/50, it has continued to rise above 24,300. Currently, the momentum signal is quite obvious, but the extent of the short-term rally is uncertain. For intraday trading, it is advisable to take profits after a shallow sweep of liquidity and then look for rebound signals. For detailed positions, please consult the plugin.
(NASDAQ 15-minute chart)
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Crude oil: The blue zone alerted by the plugin yesterday did not experience a breakthrough, so it can be used for another day today. For the exact position, please consult the plugin.
(Crude oil 15-minute chart)
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Today’s key economic data and events to focus on:
14:00 UK unemployment rate for July
17:00 Germany’s September ZEW Economic Sentiment Index
20:30 US August retail sales
22:00 US September NAHB Housing Price Index
