From the twenty-third to the twenty-fifth of June, two thousand twenty-five

I. Foundation 

resistance to change and hence greater dependability for the results shown in the past.

U.S. dollar hedging 101: background, implementation, and rationale

This year, we have discussed dollar hedging extensively on the Planet. Since 4, some of our views in this area have gradually become reality. After reading our material, quite a few people have sent private messages with detailed questions, and many of them ask the same things. This article serves as an introductory guide to 101, helping everyone understand the subject more deeply and providing a unified, detailed introduction to some necessary background knowledge and operational details.

1. Background: The U.S. dollar as the global funding currency and the dollar assets behind it

Since the global financial crisis, cross-border investment by non-U.S. investors has accounted for an increasing share of global GDP. At the same time, global borrowers have become increasingly reliant on institutional investors and non-bank financial intermediaries for financing, with a substantial portion of those funds flowing into dollar assets, especially U.S.-listed equities and long-term debt instruments.

This allocation partly reflects the appeal of the U.S. stock market’s long-term excess returns, but The fundamental reason dollar assets dominate global portfolios is still the central role of the U.S. dollar as the global funding currency.

Chart: Latest data from BIS on dollar assets in non-U.S. investors’ portfolios

2. Details: Differences in the overseas pricing impact of equities and bonds within dollar assets

Although U.S. equities account for a growing share of the dollar assets held by non-U.S. investors, foreign investors actually hold a larger amount of U.S. bonds. In terms of pricing impact, this is a question of relative shares.

In 2025 3, the total market value of U.S. stocks held by non-U.S. investors exceeded 17.6 trillion dollars, while their U.S. Treasury holdings stood at 13.6 trillion dollars. But In terms of their share of the market, foreign investors hold only 18% of U.S. equities, while their holdings of U.S. Treasuries reach 33%, including 21% of U.S. government debt.

Non-U.S. investors also hold 21% of U.S. agency and corporate bonds. If the 13 trillion U.S. dollars of dollar-denominated bonds issued by non-U.S. borrowers in offshore markets (the “Eurodollar” bond market) are included, the share of dollar debt held by non-U.S. investors may be even higher.

Geographically, the main overseas holders of dollar debt are in Asia and Europe. Once indirect holdings through European custodians and funds based in the Caribbean and European financial centers are included, Asian investors’ actual holdings are far higher than the official statistics based on residence would suggest It is worth noting that, since the global financial crisis, Private-sector investors have replaced official institutions as the largest foreign buyers of U.S. securities.

3. Fragile balance: suppressed willingness to hedge foreign-exchange risk

The expansion of foreign investment portfolios has been accompanied by a corresponding expansion in the foreign-exchange derivatives market used to hedge their currency risk...

...Hedging is usually carried out through FX swaps (FX swaps) and forward contracts (forwards). According to BIS statistics on over-the-counter derivatives, As of the end of 2024, The notional value of foreign exchange derivatives reaches 130 trillion dollars, more than three times global cross-border bond holdings; nearly nine-tenths of these contracts have a dollar asset on one side.. Institutional investors and other nonbank financial intermediaries hold about 60% of outstanding foreign exchange contracts, compared with only 45% 15 years ago.

The degree of currency-risk hedging is determined by investor type, portfolio structure, and market conditions.

Pension funds and life insurers have a higher hedge ratio for the foreign exchange exposure of their bond assets because they need to manage assets and liabilities (ALM) against future liabilities denominated in their local currencies, and they are generally subject to tighter regulatory constraints. Less tightly regulated institutions, such as asset managers and hedge funds, face fewer restrictions on their foreign exchange exposure and therefore generally have lower hedge ratios.

Across different asset classes, by contrast, the demand for currency hedging of equity assets is significantly weaker, partly because stock markets themselves tend to be more volatile than exchange rates, and partly because equity assets are more attractive to investors seeking high returns. In addition, historical data show that when market sentiment is “risk-off,” the dollar tends to appreciate, offsetting on a domestic-currency basis the paper losses on dollar equity portfolios; this also leads investors to tend not to hedge the currency risk of their equity assets.

Market factors also significantly affect the willingness to hedge foreign exchange exposure, with “hedging costs” being the main channel.

Hedging costs depend mainly on the short-term interest-rate differential between the dollar and the corresponding foreign currency, because FX swaps and forwards usually take the form of short-term contracts.Investors often use short-term instruments to hedge long-term securities, and When short-term U.S. dollar interest rates rise, hedging costs increase sharply...

...This usually happens when the U.S. Treasury yield curve flattens or even inverts, so the willingness to hedge declines significantly when the Treasury curve flattens or inverts.。Non-U.S. investors’ foreign exchange hedging is positively correlated with the slope of the U.S. dollar yield curve and negatively correlated with the slope of their local-currency yield curve (the steeper the curve, the less attractive local-currency bonds become).

The hedge ratio of Japan’s major life insurers fell from about 60% in 2021 to 40% in 2024 (sources: BOJ, 2025). At the end of 2024, Taiwan’s life insurers had a hedge ratio of about 65%, which financial statements suggest was close to a historical low (BOA, 2025). Some European pension funds have also tended to reduce their hedge ratios in recent years (Atkins, 2025).

Further reading: After the fall (also posted to the channel)

There are two main reasons for the reduction in hedge ratios:

1) High hedging costs, which make investors more inclined not to hedge.Since the Fed began this rate-hiking cycle in 22, short-term U.S. dollar interest rates have surged, significantly raising foreign exchange hedging costs. Hedging costs are especially high for Asian and European currencies because short-term interest rates in these economies are relatively low and their yield curves are steeper.

Chart: Hedging costs have surged since 22

Note: A positive hedging cost means the forward exchange rate is at a discount to the spot exchange rate (forward discount).

Note: The term spread is the difference between government bond yields at the 10-year and 3-month maturities. Here, it is the difference between the term spreads for the dollar and each regional currency, averaged simply.

2) Bullish market expectations for the dollar. From 2021 to 2024, the dollar appreciated in a sustained trend, prompting non-U.S. investors to leave their dollar assets unhedged in the hope of profiting from exchange-rate appreciation.

4. Hedging: mechanics and costs

When foreign investors hedge dollar assets through FX swaps (FX swap) or forward contracts (forward),their hedging cost is calculated as the percentage difference between the forward and spot exchange rates. This cost equals the interest-rate differential between the dollar and the corresponding foreign currency at the same maturity, adjusted for the cross-currency basis.In other words, hedging behavior is closely linked to spot exchange rates, the cross-currency basis, and overall financial conditions.

Take an investor in the euro area as an example:

1) Initially, he buys dollar bonds without hedging, then decides to hedge that exposure back into euros.

Chart: EUR-based investor with an unhedged USD security

2) To raise the hedge ratio, the investor can do so by entering into an FX swap (FX swap) contract...

First, he exchanges euros for dollars in the spot market, obtaining an unhedged dollar cash position, while the forward leg of the swap will create a dollar liability and a euro asset in the future:

Chart: Obtains an FX swap so that the future USD obligation matches the USD security

2) Next, to hedge the dollar bonds, the investor sells the dollar cash he holds and exchanges it back into euros...

What remains is a forward dollar liability matching the dollar bonds:

Chart: Sells excess USD cash in the spot market

This spot sale of dollars will directly cause the dollar to depreciate against the euro...

5. From narrative to reality

From 25 3 to 4/5, changes in the cross-currency basis also supported the view that demand for dollar hedging was rising:

Chart: Change in the cross-currency basis between March and April/May 2025

For some Asian currencies and the euro, their basis against the dollar fell further (became more negative) during 4/5, This indicates that amid a surge in hedging demand, the cost of hedging dollar exposure through the FX swap market rose markedly.

Intraday moves in the dollar, combined with intraday changes in Treasury prices, further suggest that Asian investors’ hedging contributed to the dollar’s weakness in 4/5...

Previously, high U.S. short-term interest rates and a strong dollar generally discouraged investors from hedging their currency exposure. But as the dollar weakened, some investors sought to reduce mark-to-market losses; these ex post increases in hedge ratios further intensified downward pressure on the dollar.this ex post increase in the hedge ratio further intensified downward pressure on the dollar.

It is worth noting that hedging at the same time as buying dollar assets—that is, buying dollar bonds while simultaneously selling dollars forward—has almost no effect on the exchange rate because the currency purchase and sale occur simultaneously. But adjusting the hedge ratio afterward, by increasing or reducing the portion that was initially unhedged, directly affects the spot exchange rate because buying and selling in the foreign exchange market are no longer balanced.

Chart: Change in the US dollar index (DXY) by regional trading hours

As the chart above shows, throughout 3 -5, most of the dollar’s depreciation took place during Asian trading hours...

Further reading Notes250520: Dollar weakness remains the core trend: hedging, real-money demand, and time-zone trading arbitrage

6. Still just hedging, not moving out of U.S. assets

Despite a significant dollar depreciation during non-U.S. trading hours...

But at the same time,

U.S. Treasury prices rose at the same time:

Chart: Change in US Treasury prices by regional trading hours

This indicates no direct link between the dollar’s depreciation and Treasury selling; at least in high-frequency data, there is no sign of “de-dollarization” of assets.

What this means is that The main reason the dollar weakened from 2025 4 to 5 was large-scale foreign exchange hedging by non-U.S. investors, especially Asian institutional investors, rather than a broad loss of confidence in U.S. assets.

Currently, There is no evidence that the market is making a large-scale exit from U.S. assets.. Whether we look at portfolio flows or changes in futures-market positions, Funds continue to flow into U.S. markets, but at a slower pace。Data from related investment funds also show that money continued to flow into dollar assets in 4 and 5, though the pace slowed:

Chart: International portfolio flows to US-focused funds

As for speculative positions, although net long positions in dollar futures fell in 4, the scale and pace of the decline were similar to those in other past periods of dollar weakness, with nothing unusual:

Chart: Net long dollar positions of non-commercial traders in US dollar index (DXY) futures

7. Finally:

Going forward, the influence of foreign exchange hedging on the dollar may gradually diminish. As the economic effects of the additional U.S. tariffs become more apparent, The dollar’s direction will be driven more by expectations for the U.S. economic outlook, particularly in discussions about whether to allocate to dollar assets strategically.

Even as the current bout of ex post hedging approaches its end, hedge ratios (FX hedge ratio) and how investors manage their currency exposure remain worth close attention.Because the FX swap market is over the counter (OTC), its participants are highly fragmented, making it difficult to monitor the buildup of potential vulnerabilities such as unhedged foreign exchange exposures.

In addition, A higher hedge ratio is usually accompanied by a greater maturity mismatch, because the instruments used for hedging, such as swaps and forwards, generally have shorter maturities than the duration of the assets held.

This structural mismatch exposes investors to greater rollover risk, meaning their hedging operations may be impeded when dollar funding markets come under strain.

Historically, dollar funding markets have experienced liquidity droughts during several market stress events. The most notable cases include the pandemic and the severe mismatch during the global financial crisis of 2008; in each instance, central-bank intervention was ultimately needed to restore market order.

Supplementary chart: euro real-money long positioning and Canadian-dollar hedge-fund long positioning

Both currently appear quite crowded and may face some correction going forward

2025.06.25

II. Insights 

Our Viewpoints and ideas on market...

Why a prolonged conflict is not being priced in: How the Iran-Israel conflict differs

Oil prices fell back to the key 65 level we had previously marked in just two trading sessions, Interestingly, the oil market ultimately did replicate the price action from 10 of last year. If the two trades are overlaid, the difference between their respective highs and lows is actually only about 1 points..

Chart: Price action repeated after 9 months

Before the Asian session opened yesterday, we updated the following judgments in our real-time brief on 地心:

1) 80 dollars is the key pivot level for whether crude oil can make a genuine breakout

2) If the contract opens above the 80 threshold, it could have the potential to test the 95-dollar range

3) If it opens below 80, it may fill the gap

Chart:https://www.meridianresearch.app/home?product=commodity-strategies

Everyone knows what happened next, After the high at 78.4 (the attempt to break 80 failed),

As of this writing, it has fallen nearly 11.5% over the week..

The key reason the Iran-Israel conflict has not continued to be priced in by the market as a prolonged war—“another Middle East quagmire”—is that, in fact, it differs significantly from other geopolitical issues in the region and around the world:

The Iraq War, Vietnam, Afghanistan, and, going further back, the Korean War all began with tens of thousands of ground troops and then became genuine quagmires... In this conflict, by contrast, the United States and Israel have mainly deployed naval and air assets. Thus, even if there is a potential tail risk of blowback in the future (which is why we will not actually take a direct short position), this is a different paradigm of warfare and should not be confused with the large-scale, protracted wars mentioned above.

In other words, this conflict is in effect a targeted strike that uses technology to artificially compress geographic distance..

On the other hand, As the conflict has unfolded to this point, the United States, along with Israel, has effectively achieved its objectives. The strikes have caused damage, though the extent remains to be assessed; what is certain is that Iran is unlikely to rebuild its nuclear facilities at Fordow or Natanz...

U.S. President Donald Trump said on Saturday, The strikes on Iran’s three main nuclear facilities—Natanz, Isfahan, and Fordow—had “completely and totally obliterated” its key enrichment facilities.Later, Iranian media acknowledged that parts of the Fordow facility had been subjected to “enemy strikes.”

“For many years, everyone has heard these names because they built this terrible, destructive project.Our objective was to destroy Iran’s nuclear enrichment facilities,” Trump said on Saturday evening. “The strike was a spectacular military success.”

The Fordow Fuel Enrichment Plant is located beneath a mountain and protected by anti-aircraft batteries; it was considered beyond the reach of Israeli airstrikes.Disabling Fordow was considered key to preventing Iran from obtaining nuclear weapons because the International Atomic Energy Agency (IAEA) found that the facility’s uranium enrichment level had reached 83.7%, close to the 90% needed to make nuclear weapons.

A U.S. official told Reuters that B-2 bombers took part in strikes on Iranian nuclear facilities, and Trump told Fox News that Six bunker-buster bombs were dropped on the Fordow nuclear facility, while 30 Tomahawk missiles were fired at other nuclear facilities, including Natanz.

This was reportedly the first combat use of the GBU-57-ton massive penetrator bomb.

After the strikes, Benjamin Netanyahu praised Trump’s actions, adding that “the awesome and righteous power of the United States will change history.” In a video address, the Israeli prime minister said the United States “has done what no other country on Earth could do.”

At this point, it would be better for both the United States and Israel to begin de-escalating the conflict today.. This is also a key reason the market is betting on de-escalation, the only possible tail risk lies with Iran, but its capacity to act has already been severely constrained...

At this point, an Iranian response appears inevitable; only the timing and the shock it may cause are uncertain. Direct oil-position trades carry potential spike risk, and after Iran responds, the United States and Israel will most likely continue to opt for de-escalation rather than respond or attack again.

In terms of price, this means that before oil prices fall decisively back into our core bearish range,

it is more likely to test 70 once again.

...Trump, in turn, thanked Netanyahu, saying they “worked together like perhaps no team has ever worked before”, and made significant progress in “eliminating this terrible threat to Israel.”

However, given how heavily fortified it is, the impact of the strikes on the Fordow nuclear facility may not be known for several days or even longer...

U.S. involvement also means that Israel will need to give the United States something in return in at least some areas, such as a withdrawal from Gaza.

2025.06.24

Speculative positioning in the white metals and gold

When platinum’s first round of profit-taking turned into an exit correction, we took a small position in gold:

Afterward, platinum never pulled back to the upside breakout point we were watching,

Silver, meanwhile, has continued its frenzy, with speculative positioning still at its highest level in nearly five years...

Chart: Platinum consolidates and moves sideways

Chart: Silver is even more frenzied

The reason for choosing a small position for the initial probe was that the trade setup that day was not perfect and, logically, amounted to an early entry awaiting confirmation... Against the backdrop of waiting for the setup to fail, the trade that attempted to go long the breakout in gold from an inverted triangle formation the week before last has now hit a tight stop and exited.

Chart: Monthly chart

There is one week left before the end of 6. A relatively bearish scenario is that gold could again see a rare monthly-scale decline during this current uptrend.The market’s pricing range from the second quarter may persist for several months, but the lower half of the range will most likely be retested before the end of this month.

Easing tensions in the Middle East, falling oil prices, and a stronger stock market... are not good for gold prices.

Gold supply in the New York market is currently ample. Against this backdrop, setting a new high is indeed very difficult.

2025.06.24

III. Market Pulse 

Our latest Comments on the economic and market environment

Note: All content in this article is for reference only, does not constitute investment advice, and is not a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for decisions.