Low dollar hedge ratios: could lightning strike twice?
At a Glance
The desk posits that the current low dollar hedge ratios signal a potential vulnerability for the USD, echoing prior instances where a similar positioning preceded sharp movements. Per the full note from ing-think, current hedge ratios on US investments by European buy-side players have fallen to 64%, approaching levels seen before the April 2025 dollar collapse. With a consensus target for EUR/USD standing at 1.1583 and firms like **commerzbank** and **morganstanley** projecting 1.2200 and 1.2300 by December 2026, there may be increasing speculation of a weaker dollar if the trend holds.
Key Takeaways
- 01Low dollar hedge ratios are currently at 64%, indicating potential vulnerability for the USD.
- 02Past drops in hedge ratios have preceded significant sell-offs, suggesting a similar scenario may unfold.
- 03Consensus for EUR/USD is 1.1583, with divergent targets highlighting varying views on dollar strength.
- 04Ongoing shifts in European buy-side hedging may hint at future volatility in dollar pairs.
Full Analysis
What the desk is arguing
The desk argues that the current low hedge ratios related to the dollar may foreshadow another significant sell-off similar to what was witnessed last year. According to ing-think, the European buy-side's hedge ratios on US investments have dropped to 64%, reminiscent of the prelude to the April 2025 dollar collapse.
This decline in hedging is notable, especially as it coincides with expectations of a stronger dollar in the future. Hedge ratios, which previously stood at 63% leading into last year's pivotal tariffs, were rapidly increased to 74% after the dollar's decline. Such data suggests heightened sensitivity to dollar forecasts among European investors, indicating a potential for strategic shifts in positioning either way.
Where it sits in our coverage
Our consensus target for EUR/USD is 1.1583, with a range across firms projecting between 1.1200 and 1.2000. Notable targets include: - commerzbank: Dec26 1.2200 - morganstanley: Dec26 1.2300 - deutschebank: Dec26 1.2500
This positioning aligns closely with a broader market sentiment of optimism surrounding the dollar's trajectory, as suggested by the various firm targets we monitored. Our outlook is more aggressive than that of firms like bofa, which target as low as 1.0400 for the same horizon.
How other firms see it
Firm forecasts are mixed, with a faction expecting a stronger dollar reflected in targets from commerzbank and morganstanley, among others. In contrast, firms such as bofa and danskebank present a more cautious or bearish view on the dollar’s trajectory.
Market moves in EUR/USD will likely be influenced by upcoming data releases from the Fed, and trends in Asian currencies, particularly the JPY as dollar strength impacts regional economic dynamics.
Market Implications
Traders should watch for any significant moves in EUR/USD approaching the consensus target of 1.1583. A break above this level could signal renewed dollar weakness, while a failure to hold here may force investors to reevaluate their dollar positions.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 1.1800 |
ING | Neutral | 1.1700 |
Rabobank | Bullish | 1.1800 |
From the original
Articles Low dollar hedge ratios: could lightning strike twice? Published 12:20 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Since last year’s ‘Liberation Day’ collapse of the dollar, there has been a lot of focus on dollar hed