From June twenty-third, two thousand twenty-five to June twenty-sixth, two thousand twenty-five

I. Foundation

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

Dollar hedging 101: Background, mechanics and rationale

We have covered dollar hedging extensively on Planet this year, and since 4, some of our views in this area have gradually become reality. After reading, many people have sent us private messages with questions about the details, and some of the questions are repeated. Today's article serves as an introductory guide to 101, making it easier to understand this topic in greater depth and providing a unified, detailed supplement on some relevant background 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, non-U.S. investors' cross-border investment has accounted for a growing 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 that funding flowing into dollar assets, especially U.S.-listed stocks and long-term debt instruments.

This allocation partly reflects the appeal of the long-term excess returns of U.S. stocks, but the fundamental reason dollar assets dominate global portfolios remains the central role of the U.S. dollar as the global funding currency.

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

2. Details: Differences in the impact of overseas pricing on dollar-denominated equities and bonds

Although U.S. equities continue to make up a growing share of non-U.S. investors' dollar assets, By comparison, foreign investors actually hold a larger amount of U.S. bonds; in terms of pricing impact, this is a matter 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 Treasury holdings amounted to 13.6 trillion dollars. But As a share of the market, foreign investors hold only 18% of U.S. stocks, while their holdings of Treasury securities amount to 33%, including 21% in Treasury bonds.

Non-U.S. investors also hold 21% of U.S. agency and corporate bonds. If we include the 13 trillion dollars of dollar-denominated bonds issued offshore by non-U.S. borrowers (that is, in the Eurodollar bond market), 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. Notably, 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 portfolios has been accompanied by a corresponding expansion in foreign-exchange derivatives markets used to hedge currency risk...

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

The extent of foreign-exchange risk hedging depends on the type of investor, portfolio structure and market conditions.

Pension funds and life insurers have a high hedge ratio on the currency exposure of their bond assets because they must manage assets and liabilities against future liabilities denominated in their domestic currency (ALM), and they are usually subject to stricter regulatory constraints. By contrast, less-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 asset classes, By contrast, Equity assets have significantly less need for currency hedging, partly because stock markets themselves are often 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-averse, the dollar often appreciates, 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 holdings.

Market factors also have a significant effect on the willingness to hedge foreign exchange risk; the main channel is the cost of hedging.

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

...This typically occurs 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’ FX hedging activity is positively correlated with the slope of the U.S. dollar yield curve and negatively correlated with the slope of their local-currency yield curves (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). The hedge ratio of life insurers in Taiwan, China, was about 65% at the end of 2024 and, based on estimates from financial statements, 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 in the group)

There are two main reasons for the lower hedge ratios:

1) High hedging costs have made investors more inclined not to hedge.Since the Fed began this rate-hiking cycle in 22, short-term dollar rates have surged, significantly increasing foreign exchange hedging costs. Hedging costs for Asian and European currencies are particularly high because short-term 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 the yields on government bonds with maturities of 10 years and 3 months. Here, it is the difference between the term spreads for the dollar and each regional currency, averaged arithmetically.

2) Market expectations for the U.S. dollar are bullish. During the period from 2021 to 2024, the dollar appreciated in a sustained trend, prompting non-U.S. investors to choose not to hedge their dollar assets, hoping to profit from exchange-rate appreciation.

4. Hedging: methods and costs

When foreign investors hedge dollar assets through foreign exchange 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 difference between dollar and corresponding foreign-currency interest rates for 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:

1) Initially, the investor buys dollar bonds without hedging, then decides to re-hedge that exposure back into euros

Chart: Investor based in EUR with an unhedged USD security

2) To increase the hedge ratio, the investor can achieve this by entering into a foreign exchange swap (FX swap)...

First, the investor converts euros into dollars in the spot market, obtaining an unhedged dollar cash position. At the same time, the forward leg of the swap will create a dollar liability and a euro asset in the future:

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

2) Next, to hedge the dollar bond, the investor sells the dollars in hand and converts them back into euros...

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

Chart: Sells excess USD cash in the spot market

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

5. From narrative to reality

From 25 3 to 4/5, the change in the cross-currency basis was also consistent with 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, indicating that amid a surge in hedging demand, the cost of hedging dollar exposure through the foreign exchange swap market rose markedly.

Intraday movements in the dollar, combined with intraday changes in Treasury prices, also suggest that Asian investors’ hedging activity played a role in the dollar’s weakness in 4/5...

Previously, investors were generally reluctant to hedge currency exposure because of high U.S. short-term interest rates and a strong dollar. But as the dollar weakened, some investors, seeking to reduce mark-to-market losses, this upward adjustment in the hedge ratio after the fact (ex post hedging) further intensified the downward pressure on the dollar.

It is important to note 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 exchange rates, because the currency purchase and sale happen at the same time. 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 symmetrical.

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

As shown above, throughout 3 -5, most of the dollar’s depreciation occurred 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 exiting U.S. assets

Although the dollar saw significant depreciation during non-U.S. trading hours...

But Meanwhile,

U.S. Treasury prices, however, rose:

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 at the high-frequency data level, there is no sign of “de-dollarization” of assets.

What this means is that The main reason the dollar weakened from 4 to 5 in 2025 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。Related fund data also show that capital continued to flow into dollar assets in 4 and 5, although the pace of inflows 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 notably unusual:

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

7. Finally:

Going forward, FX hedging may gradually play a smaller role in driving the dollar exchange rate. As the economic effects of the U.S. tariff increases gradually emerge, The dollar’s trajectory will be driven more by expectations for the U.S. economic outlook particularly in discussions about whether to allocate dollar assets strategically.

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

In addition, Higher hedge ratios usually go hand in hand with greater maturity mismatches, because the instruments used for hedging (such as swaps and forward contracts) generally have shorter maturities than the duration of the assets held.

This structural mismatch exposes investors to higher rollover risk, meaning that their hedging operations may be disrupted when dollar funding markets come under pressure.

Historically, dollar funding markets have experienced liquidity shortages during several market stress events, most notably during the pandemic and the severe mismatches of the global financial crisis in 2008. In each case, central-bank intervention was ultimately needed to restore market order.

Supplementary chart: Real-money long positioning in the euro and hedge-fund long positioning in the Canadian dollar

Both currently look rather crowded and may face some retracement going forward

2025.06.25

II. Insights

Our Viewpoints and ideas on market...

Why it is not being priced as a prolonged conflict: How the Iran-Israel conflict is different

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

Chart: Price action repeated after 9 months

Before the Asian session yesterday, we updated several views in our real-time short commentary:

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 the open is below 80, it may fill the gap

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

Everyone knows what happened next, After reaching the high of 78.4 (the attempt to break through 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 by the market as a prolonged war—“another Middle Eastern quagmire”—is that it is in fact significantly different from other geopolitical issues in the region and around the world:

The Iraq War, Vietnam, Afghanistan, and, further back, the Korean War all began with tens of thousands of ground troops and then became quagmires in practice... In this conflict, by contrast, the United States and Israel have relied mainly on naval and air assets. So even if there is a potential risk of blowback at the tail end in the future (the reason we will not actually enter the market to short directly), it belongs to a different paradigm of warfare and should not be conflated with the concentrated, prolonged wars mentioned above.

In other words, this conflict is essentially a targeted strike in which technology has artificially compressed geographic distance..

On the other hand, As the conflict has unfolded to this point, the U.S. and Israel have in effect already achieved their objectives: the strikes have caused damage. Although the extent of the damage remains to be assessed, one thing is certain: 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—left its key enrichment facilities “completely destroyed.”Iranian media later 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 goal was to destroy Iran’s nuclear enrichment facilities,” Trump said on Saturday evening. “This strike was a spectacular military success.”

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

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

According to reports, this was the first combat use of the GBU-57 large bunker-buster bombs.

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 “did what no other country on Earth could do.”

At this point, the better course for both the United States and Israel is to begin de-escalating the conflict today.. This is another key reason the market is betting on de-escalation, the only possible source of tail risk is Iran but its capacity to act is already severely constrained...

At this point, a response from Iran is inevitable; only the timing and impact are uncertain. Direct oil-position trading carries potential spike risk, and after Iran responds, the United States and Israel are more likely to continue de-escalating than to retaliate or launch another attack.

In terms of price, this means that before oil fully falls back into the downside range we are focused on,

it is more likely to test 70 once again.

...Trump then thanked Netanyahu, saying they “worked together as a team like perhaps never before”and made significant progress in “eliminating this terrible threat to Israel.”

However, given the strength of its fortifications, it may take several days or even longer to learn the impact of the attack on the Fordow nuclear facility...

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

2025.06.24

Speculative positioning in the white metals and gold

When platinum’s first move shifted from profit-taking to an exit correction, we opened a small position in gold:

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

while silver continued its frenzy, with speculative positioning still at its highest level in nearly five years...

Chart: Platinum treading water

Chart: Silver getting even more frenzied

We chose a small trial position because the trade setup that day was not perfect and, logically, it was an anticipatory entry pending confirmation... Against the backdrop of confirmation failing to arrive, the trade we tried to put on two weeks ago—going long a gold breakout from a descending triangle—has hit its tight stop and been closed.

Chart: Monthly chart

There is one week left before the end of 6. A relatively bearish scenario is that gold could once again see a rare monthly-scale extension lower during this uptrend cycle.The market’s second-quarter pricing range may remain in place 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, and in this context, making a new high is indeed very difficult.

2025.06.24

A key decision point in macro trading: discussing a new surge in EUR

After exiting at the top in 4.21, the FX market actually remained outside our strike zone for more than a month, until we bought back in during the week of 6.11.Last week, this part of the trade returned to its entry price, and the critical moment had arrived to choose whether to keep holding or admit we were wrong and exit. In our Notes, we published two Notes in succession (250618 on the FX position we were holding & 250621 follow-up on the FX position we were holding) to explain how we planned to handle the situation under the guidance of our macro framework.

The key points discussed included the following:

1/ In 0618, the call-option premium on 1-month Risk Reversals in the euro-dollar options market suddenly disappeared after reaching a historical high, This has happened only 7 times in history, and only the instance in 07 was followed by a significant rally after a pause..

Chart: 618 marks a key decision point for euro-dollar

The reason we wanted to discuss the FX position that day was After breaking out, euro-dollar fell back below the key price level at 1.15. Voices across the market were proclaiming that euro buying was over, and 3 leading international investment banks explicitly said the euro trade was finished and a reversal was near... Technical analysis and other commentary were also calling euro-dollar a false breakout forming an M top...

For those of us holding long positions,

The critical decision point had arrived: follow the market’s calls and exit, or stick with the position..

2/ At the time, The most important point was to determine whether this change in pricing meant the end of the bullish euro-dollar narrative, or was merely triggered by rapid deleveraging amid fears over the situation in the Middle East，Our answer in 0618 was: “At this point, the latter seems more likely; in other words, this is not a genuine bearish signal.”

3/ The key judgment on whether to close the FX position at the time, We set out two clear decision criteria，First, whether the dollar index would break above the downtrend line in place since the start of the year; second, whether the geopolitical trade would move from phase one to phase two—that is, whether the dollar would shift from weighing on gold to moving in the same direction as gold...

4/ By 0620, the Iran-Israel conflict was still dominating the media’s trending topics, A tail risk related to FX positioning continued to weigh on market trading appetite; a low-probability but high-impact outcome remained possible,

We wrote the following in that day’s Notes:

“If the risk persists unexpectedly (again, low probability but not impossible; in today’s world, nothing is impossible), energy prices surge sharply, and the point mentioned in Notes250618 on the FX position we were holding & the two stages of geopolitical trading, 1) the US Dollar Index breaks above the downtrend line in place since the start of the year 2) geopolitical trading enters phase two, and gold and the US dollar move in the same direction, then the highly crowded short-dollar positions in the market may be the first to be squeezed...”

However, Beyond flagging the risks, we also gave our view of the situation...

That is, this shock event Most likely, it will be a replay of 10 last year...

One additional point: looking back from today, it really did play out as a perfect replay of 10 last year...

(Facing Mr. Market, being right brings only fear https://mp.weixin.qq.com/s/BPMJZUnd86N0bf8fkIkN-Q）

After we put our judgment in black and white, from the 18th to the 23th, euro-dollar continued to hover at low levels. Price action seemed to threaten a fall at any moment, and talk of the trade being over continued to gain traction. On many institutional calls over the weekend, whether to close euro positions was the top discussion point (ahead of oil trades).

However, for us, the decision was relatively simple, because neither of our two decision criteria supported exiting the trade...

The voices in the market are just noise...

Chart: The dollar index fails in its attempt to break out

Chart: The geopolitical 2.0 trade between the dollar index and gold fails

After that, by this week,

Thereafter, this week, the euro (like a number of FX trades) began to recover and resume its rise as geopolitical tensions eased...

Chart: The euro continues rising after the pressure lifts

As we keep saying, why is cross-asset logic so important...? Longtime friends of the community should already know this by heart, but today we’ll explain it again for newcomers.. because within a single market, you have no valuation anchor.Value has a different answer in everyone’s mind, while price spreads are plain to see; this is Graham’s final piece of advice to the world in Security Analysis

Finally, once again, an update to our preliminary target for euro-dollar:

One final note: attentive readers may have noticed that in last weekend’s Wrap we said:

“JPY has been completely removed from our watchlist...”

The chart below shows a very clear result:

Chart: EUR, CHF, JPY

If there’s time, I’ll discuss this tomorrow.

CHF remember to take a look yourself too.

2025.06.26

III. Market Pulse

Our latest Comments on the economic and market environment

A few simple points: the Fed, oil prices, gold, the dollar index

1/ Trump publicly humiliates Powell at the NATO summit, and debate over who will succeed him intensifies.

2/ Powell has 11 months left in his term. He will not resign voluntarily, but FOMC’s internal members have already begun quietly vying for his position, which means that from now on, with each vote, more people will choose to support rate cuts.

3/ Rate cuts are coming, and oil prices continue to fall, Both are powerful catalysts for the stock market.

4/ Gold and the S&P...

Chart: It has already broken below the 0.548 we were watching

A liquidation may occur.