June twenty-third, two thousand twenty-five to June twenty-seventh, two thousand twenty-five

I. Foundation

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

101 hedging: background, mechanics, and rationale

This year, the Planet has covered a lot about dollar hedging. Since 4, some of our views in this area have gradually become reality. After reading, quite a few people sent private messages with questions about the details, and many of those questions were similar. This article serves as an introductory guide to 101, making it easy to develop a deeper understanding of the subject and providing a unified, detailed supplement on some essential background information and operational details.

1. Background: the dollar as a 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 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 funding, with a substantial portion of that capital flowing into dollar assets, especially U.S.-listed equities and long-term debt instruments.

This allocation partly reflects the appeal of the long-term excess returns of U.S. equities, but The fundamental reason dollar assets dominate global portfolios remains the central role of the dollar as a 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 equities and bonds among dollar assets

Although U.S. equities have continued to grow as a share of non-U.S. investors’ dollar assets, but By comparison, foreign investors actually hold a larger amount of U.S. bonds; in terms of pricing impact, this is a matter of relative share.

In 2025 3, non-U.S. investors held more than 17.6 trillion dollars in U.S. equities, while their Treasury holdings totaled 13.6 trillion dollars. But As a share of the market, foreign investors hold only 18% of U.S. equities, compared with 33% of Treasury holdings, 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 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 Caribbean and European financial centers are included, Asian investors’ actual holdings are far higher than the official statistics based on residency. It is worth noting that since the global financial crisis, Private-sector investors have replaced official institutions as the largest overseas buyers of U.S. securities.

3. A fragile equilibrium: suppressed demand for foreign-exchange hedging

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

...Hedging is usually done through foreign-exchange swaps (FX swaps) and forward contracts. According to BIS’s 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, and nearly nine-tenths of contracts had dollar assets on one side.. Institutional investors and other non-bank 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.

Because pension funds and life insurers must manage assets and liabilities (ALM) against future liabilities denominated in their local currencies, they hedge a higher proportion of the currency exposure in their bond assets and are generally subject to tighter regulatory constraints. By contrast, less-regulated institutions such as asset managers and hedge funds face fewer limits on their foreign-exchange exposure, so their hedge ratios are generally lower.

Across different asset classes, By contrast, The demand for currency hedging of equity assets is significantly weaker, partly because stock markets themselves are often more volatile than exchange rates and partly because equities are more attractive to investors seeking high returns. In addition, historical data show that During risk-off market sentiment, the dollar often appreciates, offsetting on a local-currency basis the paper losses in dollar equity portfolios. This also leads investors to tend not to hedge the currency risk of equity assets.

Market factors also significantly affect the willingness to hedge foreign-exchange risk, with “hedging costs” as the key channel.

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

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

The hedge ratio of major Japanese life insurers fell from about 60% in 2021 to 40% in 2024 (sources: BOJ, 2025). At the end of 2024, Taiwanese life insurers had a hedge ratio of about 65%, estimated from financial statements to be 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 on Planet)

There are two main reasons for the reduction in 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 raising foreign-exchange hedging costs. Hedging costs are especially high for Asian and European currencies 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 using a simple mean.

2) Bullish 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 using foreign-exchange swaps (FX swap) or forward contracts, 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 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 as an example:

1) He initially 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 increase the hedge ratio, the investor can achieve this by entering into a foreign-exchange swap (FX swap) contract...

First, in the spot market, he exchanges euros for dollars, obtaining an unhedged dollar cash position. Meanwhile, 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 dollar cash he holds and converts it back into euros...

What remains is a forward dollar liability that matches the dollar bond:

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 were 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, the basis against the dollar fell further (that is, became more negative) in 4/5, This indicates that amid a surge in hedging demand, the cost of hedging dollar exposure through the foreign-exchange swap market rose significantly.

Intraday movements in the dollar, combined with intraday changes in Treasury prices, further indicate that Asian investors’ hedging activity played some role in the dollar’s weakening in 4/5...

Previously, high U.S. short-term interest rates and a strong dollar generally discouraged investors from hedging currency risk. But as the dollar weakened, some investors sought to reduce paper losses, this increase in the hedge ratio after the fact (ex post hedging) further intensified downward pressure on the dollar.

Note that if investors hedge at the same time as they buy dollar assets (that is, buy dollar bonds while simultaneously selling dollars forward), the simultaneous currency purchase and sale have almost no effect on the exchange rate. But if they adjust the hedge ratio afterward—that is, increase or decrease the portion that was originally unhedged—they directly affect 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, Notes 250520: Dollar weakness remains the core trend: hedging, real-money flows, and time-zone trading arbitrage

6. Still just hedging, not a move away from U.S. assets

Although significant dollar depreciation occurred 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 shows that dollar depreciation is not directly linked to 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, particularly Asian institutional investors, rather than a broad loss of market confidence in U.S. assets.

At present There is no evidence that the market is withdrawing from U.S. assets on a large scale. Whether we look at portfolio flows or changes in futures-market positions, Capital is still flowing into the U.S. market; the pace has simply slowed。Relevant investment-fund data also show that funds continued to flow into dollar assets in 4 and 5, but at a slower pace:

Chart: international portfolio flows to US-focused funds

As for speculative positions, although net long positions in dollar futures declined in 4, the scale and pace of the decline were similar to those in previous periods of dollar weakness, with no obvious anomaly:

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

7. Finally:

In the future, the influence of foreign-exchange hedging on the dollar exchange rate may gradually diminish. As the economic effects of U.S. tariff increases gradually emerge, The dollar’s direction will be driven more by expectations for the U.S. economic outlook, especially in discussions about whether to allocate strategically to dollar assets.

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

In addition, Higher hedge ratios are usually accompanied by greater maturity mismatches, because hedging instruments 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 that their hedging operations could be disrupted when dollar funding markets come under pressure.

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

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

They do indeed look rather crowded, and may face some pullback going forward.

2025.06.25

II. Insights

Our Viewpoints and ideas on market...

Why isn’t it being priced as a protracted conflict: how the Iran-Israel conflict is different

Oil prices fell back to the key level we had previously marked within just two trading days,65 What is interesting is that the oil market ultimately traced a replay of last year’s 10 move; if we overlay these two trades, we can see that the difference between the respective highs and lows is only about 1 points..

Chart: Price action repeated after 9 months

Before the Asian session yesterday, we updated several views in our Earth’s Core real-time brief:

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

We all know what happened next, After the high at 78.4 (the attempt to break 80 failed),

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

The key reason the Iran-Israel conflict has not continued to be priced by the market as a long-term war, “another Middle Eastern quagmire,” is that it is in fact markedly different from other geopolitical issues in this region and around the world:

The Iraq War, Vietnam, Afghanistan, and going back to the Korean War, all began with tens of thousands of ground troops and then became full-fledged quagmires... 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 tail risk of blowback in the future (which is why we will not actually step in and short directly), it belongs to a different paradigm of warfare and should not be confused with the concentrated, long-term wars mentioned above.

In other words, this conflict is in practice 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, including Israel, has in fact substantially achieved its objectives. The strikes have caused damage; although the specific extent remains to be assessed, it is clear that Iran is unlikely to rebuild its nuclear facilities at Fordow or Natanz...

US 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 Saturday evening. “This 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 is considered key to preventing Iran from acquiring nuclear weapons, because the International Atomic Energy Agency (IAEA) found that uranium enrichment at the facility had reached 83.7%, close to the 90% required to make nuclear weapons.

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

Reportedly, this was the first combat use of GBU-57-ton heavy bunker-buster bombs.

After the attack, Benjamin Netanyahu praised Trump’s action, 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 start de-escalating the conflict today.. This is another key reason the market is betting on de-escalation, The tail risk can only come from Iran, but its capacity to act is already severely constrained...

At present, Iran’s response appears inevitable; the uncertainty lies only in the timing and the shock it may cause. Direct oil-position trades carry potential impulse risk, and after Iran responds, the United States and Israel are highly likely to continue choosing de-escalation rather than responding or attacking again.

In terms of price, this means that before oil prices fall all the way back into our core downside range,

it is more likely to test 70 once again.

...Trump, in turn, thanked Netanyahu, saying they “worked together 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...

US involvement also means 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 positions in the white metals and gold

When platinum’s first round moved from profit-taking to an exit correction, we took a small position in gold:

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

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

Chart: Platinum locked in a tight range

Chart: Silver is even more frenetic

The reason we chose a small trial position is that the setup on that day was not perfect and, logically, it was an early entry awaiting confirmation... Against the backdrop of confirmation failing to arrive, the gold breakout trade we tried two weeks ago in a descending triangle has hit a tight stop and exited.

Chart: Monthly chart

There is one week left before the end of 6. In a relatively bearish scenario, gold could once again see a rare monthly-chart extension lower since this uptrend began.The market’s pricing range for the second quarter may persist for several more months, but the lower half of the range will most likely be retested before this month ends.

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

Gold supply in the New York market is currently ample, making fresh record highs very difficult in this environment.

2025.06.24

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

After exiting at the 4.21 peak, the FX market was outside our striking range 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 crucial moment to decide whether to keep holding or admit we were wrong and exit had arrived. We published two consecutive Notes (250618Discussing the FX positions we are holding & 250621Follow-up on the FX positions we are holding) explaining how we planned to handle this under the guidance of our macro thesis.

Among the key points discussed were:

1/ In 0618, the call premium for 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 occurrence in 07 was followed by a significant rise after a pause..

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

The reason we discussed our FX positions that day was After breaking out, euro-dollar fell back below the key price of 1.15, and voices across the market loudly proclaimed that euro buying was over. 3 leading overseas investment banks explicitly said the euro trade was finished and a reversal was near... Technical analysis and other commentary all labeled euro-dollar a false breakout forming a double top...

For those of us holding long positions,

the key decision point had arrived: exit in response to the market’s message, or hold firm to our positions..

2/ At the time, the most important thing was to determine whether this change in pricing signaled the end of the bullish euro-dollar narrative or was merely a rapid deleveraging triggered by 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 about whether to close the FX positions at the time, we set out two clear decision criteria，First, whether the US 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 rising alongside it...

4/ By 0620, the Iran-Israel conflict was still dominating media headlines, A tail risk to FX positions continued to weigh on the market’s appetite for trades; low-probability but high-impact outcomes remained possible,

We wrote 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 factors mentioned in Notes 250618Discussing the FX positions we are holding & the two phases of geopolitical trading—1) the US Dollar Index breaks above its downtrend line from the start of the year 2) geopolitical trading enters phase two, with gold and the dollar trading in the same direction—then the highly crowded dollar-short positions currently in the market may be the first to face a short squeeze...”

However, in addition to highlighting the risks, we also gave our view of the situation...

namely, this shock event will most likely be a repeat of 10 last year...

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

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

After we had written down our view in black and white, from the 18th to the 23th, euro-dollar continued to hover at low levels, and its price action seemed poised to fall at any moment. The market’s view that the trade was over continued to gain traction; in many institutional calls over that weekend, whether to close euro positions was the first topic of discussion (ahead of oil trades).

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

Market chatter is just noise...

Chart: The US Dollar Index’s attempt to break out failed

Chart: The US Dollar Index and gold failed to move in the same direction during the geopolitical 2.0 trade

After that, as we reached this week,

the euro, like a number of other FX trades, resumed its climb as geopolitical tensions eased...

Chart: The euro resumed rising after the headwind ended

As we keep saying, why is cross-asset logic so important...? Our longtime readers should know it by heart by now; today, let’s explain it once again for new readers... Because within a single market, you have no pricing anchor.Value has a different answer in everyone’s mind, while price spreads are plain to see. This was Benjamin Graham’s final counsel to the world in Security Analysis

Finally, another update to our preliminary euro-dollar target:

One final point: careful readers may have noticed again that in last weekend’s Wrap we said:

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

The chart below makes the result very clear:

Chart: EUR, CHF, JPY

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

CHF remember to take a look yourself too.

2025.06.26

On the removal of the 899 provision

Senate Finance Committee Chair Crapo and House Ways and Means Committee Chair Smith recently announced that Section 899 would be removed. The provision was originally intended to increase taxes on foreign investors, companies, and governments. This discussion is covered in Notes 250604From Commodity Tariffs to Capital Tariffs: The Hidden Section 899.

The decision to remove the provision stemmed from a key statement by Bessent:He said the United States had reached an understanding with G7 countries to exclude US companies from the rules under the OECD global minimum tax (Pillar 2).Over the coming weeks to months, the United States will seek to formally implement the agreement within the OECD framework.

One key element may be to recognize the US tax on “global intangible low-taxed income” (GILTI) as a “Qualified Income Inclusion Rule, Q IIR” approved by OECD, thereby reducing the tax burden US companies face in other countries at the level of the rules.

Here is the original statement:

According to FT, EU officials said that the interim agreement reached by the US and G7 must be formally approved by OECD next week. The key idea behind the agreement is recognition that the US tax system is “broadly equivalent,” which essentially clarifies that the GILTI regime will be considered compliant, paving the way for US companies to be exempted from additional taxes abroad.

In short, this is a deal. The United States reached an agreement with G7, to shield US companies from some taxes imposed by other countries in exchange for removing Section 899 from the tax bill.

The original rationale for proposing 899 was to counter the global minimum tax regime (15%) proposed by OECD. The framework for this minimum tax was negotiated and established with Yellen’s participation during the Biden administration. Republicans and Trump administration officials have consistently criticized the agreement, arguing that it hands US taxing rights over to other countries.

Behind this global minimum tax lies a broader international agreement: more than 140 countries have agreed under the OECD framework, with the goal of applying a 15% corporate income tax floor wherever multinational companies operate.

Recently, the Treasury, under the direction of the Trump team, has actively pushed to fully separate the US tax system from OECD’s global tax framework, on the grounds that the United States already imposes relatively heavy taxes on its companies’ foreign income.

However, although the provision’s eventual removal will ease the structural pressure facing the dollar, it will not fully reverse the negative effects that had already taken shape, for two main reasons:

1) Even if the legislation is never implemented, the fact that it was seriously planned has already sent a clear signal. This shift from tariffs on goods to tariffs on capital is enough to prompt global institutions to apply a higher risk assessment when allocating to US assets, and also means that the current administration may consider similar capital-control-type policy approaches in the future.

2) A more substantive concern is that Section 891, outside 899, also grants the president the power to double tax rates on foreign individuals and companies in response to certain foreign tax policies. (Section 891 still authorizes the president to double rates on foreign individuals and companies in response to discriminatory or extraterritorial taxation of US companies.)

Given the G7 agreement announced recently, this power is unlikely to be used in the short term. But if other countries fail to honor their commitments, the provision could still become a tool (and remains a potential tool in future tax disputes).

In short, although the repeal of Section 899 is a positive signal, the structural rift in the market’s trust in dollar assets is not fully healed.

The Senate is expected to vote on the fiscal bill this weekend, but if some disputes are not resolved in time, the vote could be delayed until early 7. When the bill ultimately becomes law will depend on the progress in reconciling the House and Senate versions and the Senate’s own deliberations. Overall, the likelihood of passage in early 7 has risen, but a delay until late 7 or early 8 remains possible.

2025.06.27

III. Market Pulse

Our latest Comments on the economic and market environment

A few brief points: the Federal Reserve, oil prices, gold, and the US Dollar Index

1/ Trump publicly humiliated Powell at the NATO summit, and discussion about who might succeed him is growing more intense.

2/ Powell has 11 months left in his term; he will not resign voluntarily, but FOMC insiders have already begun quietly vying for his position, which means that from now on, more and more people will choose to support rate cuts at each vote.

3/ Rate cuts are coming, and oil prices keep falling, Both are powerful catalysts for the stock market.

4/ Gold and the S&P...

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

A liquidation may occur.

2025.06.26

A few brief points: the Fed, oil prices, gold, the U.S. dollar index (continued)

To clarify: some people still haven’t understood—the chart is XAU/SPX. First, the gold bulls get wiped out, then the stock bulls.

By liquidation, I mean that, from the perspective of the ratio, both the previous support below and the previous resistance above will be decisively broken.

Chart: down first, then up