Foreign buying of US assets have returned in Q2CY25 both in equities & debt. For equities, the data indicates that foreigners stepped up big-time, buying almost $300bn after barely buying in recent years. On the debt side, foreigners bought $200bn in Q2 (one-third of the total net issuance), though this was a little lower than the pace of recent years. Foreigners now own 18% of US equities, a record amount. They own almost a quarter of US debt securities, having been buyers of a third of net issuance in the past couple of years. But these inflows are significantly hedged now than before. For the first time this decade hedged US inflows are now dominating over unhedged exposure. The shift is exceptionally stark in equities (more than 80% of inflow is now hedged), but also very apparent in bonds (around 50%). Some investors have lifted hedge ratios for existing holdings also. Increased hedging could be the simple first option - there may still be reallocations away from the US to come. The FX implications are clear: foreigners may be buying US assets, but they don’t want the dollar exposure that goes with it. For every dollar asset that is bought, an equivalent amount of currency is sold to remove the FX risk. It is only unhedged inflows that finance the US current account deficit and these are running 75% below the peak from last year. The dollar is falling because the unhedged flow picture looks very weak. With the Fed about to start cutting rates while most other central banks are on hold, hedging dollar assets will only get cheaper. The improvement in the flow picture has arguably removed some of the extreme tail risks that would have resulted from a complete absence of inflows. Uncertainty about the underlying steady state of demand for US assets remains high however. In the mean-time the underlying cyclical support for the dollar has deteriorated, reflected in a material narrowing in the EUR – US rate differential which is now consistent with a financial fair value in EUR/USD in the 1.18-1.20 range. It is stating the obvious that additional Fed cuts from here would increase incentives to hedge dollar assets by foreign investors. With the dollar having in the meantime removed any excess cheapness / risk premium relating to President Trump’s policies, it still leaves the overall outlook as leaning asymmetrically dollar bearish. This can only change if the growth differential between EU & US widens which can happen in CY26 when US tax cuts come into play supporting corporate growth & Fed rate cuts aid HH BS. But by then German fiscal stimulus will also be in play. So, it’s a complex play in CY26 but at least for CY25 EUR bid against DXY might continue as hedging flows over power other fx determinants.
