Bruised European investors start hedging US assets
European investors are poised to increase their currency hedges against US assets, senior bankers said, as the dual hit of a declining S&P 500 and a weaker US dollar has inflicted heavy losses on overseas money managers this year.
Concerns over the US economy, technology stock valuations and president Donald Trump's erratic tariff plans have pushed the S&P 500 down 7% from its February high, and sent the US dollar sliding 4% against the euro this year. That dynamic has proved particularly painful for European investors who, until recently, tended to leave their US equity holdings largely unhedged due to the sustained strength and stability of the greenback.
A murkier outlook for the dollar and US stock market in recent weeks is now encouraging investors to shift gears and increase foreign exchange hedges as they seek to shield themselves against further losses.
“It has been an extremely painful few weeks for European investors,” said Oliver Jerome, head of FX, Europe, at Deutsche Bank. “The double-whammy of significantly weaker US stock markets and a significantly weaker dollar has caught investors by surprise and created a huge amount of pain.”
Jerome said investors tried to put on dollar hedges earlier this month when volatility picked up, but they were limited because of the speed of the moves.
"We’ll definitely see significantly more hedging from European investors ... but large asset managers are not quick to move and so there’s still a lot of thought and consideration happening around how and when they position themselves," he said.
Foreign investors are a major presence in US markets, owning about US$31trn of US securities as of June, according to the US Treasury, almost twice as much as they held 10 years earlier. Of that total, the value of foreign investors' US equity holdings has more than doubled to US$17trn.
A rising tide
The twin benefits of rising US stock markets and a strong dollar have provided a huge windfall for investors over the years. The S&P 500 has more than tripled over the past decade in euro terms, compared with a 177% rise for dollar investors. That consistent dollar strength lulled many European investors into thinking that currency hedges weren't just unnecessary, they were also unprofitable.
Many people headed into the year expecting the Trump administration's pro-growth policies to continue buoying the dollar and the stock market but the swift reversal on both parts of that trade has proven extremely painful. US tech stocks have come under pressure since China's DeepSeek AI model was unveiled in January. Meanwhile, White House stop-start tariff policies have heaped further pain on US stock markets and sparked concerns over growth.
That has coincided with Germany outlining plans to boost fiscal spending by nearly €1trn, which has prompted investors to raise European growth forecasts and pushed the euro higher against the dollar. This fast-changing backdrop has forced a rethink among European investors over their US portfolios.
"People are very concerned that this assumption of dollar stability and strength that we've had for such a long period of time has now disappeared due to a combination of policy uncertainty around tariffs, the US growth outlook being downgraded quite significantly, and the growth outlook for Europe being upgraded at the same time," said Jackie Bowie, head of EMEA at consultancy Chatham Financial, who said her firm has been fielding calls from many European investors that have never done currency hedging before.
"This whole move away from persistent dollar strength to persistent dollar weakness is causing European investors to take a much closer look at their hedging strategies," she said.
Hedging timelines
The euro has risen from a low of US$1.04 against the dollar in late February to a peak of US$1.09, but many analysts believe the single currency's winning streak could have further to run. Strategists at BNP Paribas said the euro could hit US$1.12 this year and US$1.20 by the end of 2026, driven by increased eurozone fiscal spending.
Despite such projections, there is disagreement over when exactly fund managers should start putting hedges in place because of the considerable uncertainty over global trade tariffs. Some investors are keen to hold fire at least until April 2 when more tariffs are set to take effect on what Trump has dubbed “Liberation Day", in the hope that greater clarity emerges over Washington's trade plans.
“We've seen a degree of tariff fatigue across client segments over the past two weeks, so clarity on April 2 will be key to renewed hedging activity once the market digests the extent of tariffs across countries and sectors in relative terms as well as any retaliatory tariffs,” said Philip Bear, global head of G11 FX and precious metals spot trading at UBS.
However, others caution against delaying. "Generally, the conversations we’ve had with clients have seen them put on hedges pretty much immediately," said Bowie. "If they wait in the hopes of getting a better rate, their bet could go the other way and they could end [up] facing a much worse rate due to even higher volatility," she said.
