Low dollar hedge ratios: could lightning strike twice?
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.
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.
How firms align with this view
Aligned with the desk view
Contrary positioning
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.
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.
Risks to this view
A reversal of the current dollar trajectory could occur if U.S. economic data significantly outperforms expectations, or if geopolitical tensions lead to unexpected dollar strength. Additionally, a shift in Fed policy stance would also critically affect dollar positioning and hedge ratios.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 1.1800 |
ING | Neutral | 1.1700 |
Rabobank | Bullish | 1.1800 |
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 hedge ratios. Low levels of dollar hedging heading into that April 2025 tariff announcement were widely seen as contributing to the sharp dollar sell-off.
Data suggests those hedge levels are getting very low again Chris Turner Everyone loves the dollar US President Trump’s decision to launch a military assault on Iran at the end of February triggered widespread dollar buying. This was largely a function of the energy story, where the ‘haves’ – the US – were rewarded at the expense of the ‘have-nots’ – Europe and Asia. The dollar received a second fillip in June when it looked like new Fed Chair, Kevin Warsh, was about to restore the Fed’s inflation-fighting credibility with a rate hike.
That summer optimism on the dollar looks to have carried through to the buy-side, where some estimates suggest that European FX hedge ratios on US investments have been cut back to their lowest levels since February 2025. The data we show in the chart below comes from the Danish central bank and marks the FX hedge ratios from Denmark’s insurance and pension fund industry. We appreciate this is just a snapshot of a very broad European buy-side, but the data did capture the events of March/April 2025 pretty well.
Back then, the Danish buy-side went into ‘Liberation Day’ tariffs with hedge ratios on US investments at 63%, only to rush them up to 74% by the end of April. As of the end of June this year, these hedge ratios have been cut back to 64% – presumably on the conviction view that most roads lead to a firmer dollar. European buy-side US hedge ratios fall again Source: Danish Central Bank, Refinitiv "> Source: Danish Central Bank, Refinitiv European buyside looks underhedged But looking at this data, it seems fair to describe the European buy-side as ‘underhedged’ when it comes to its US investments.
While not as statistically significant as it could be, data since 2015 suggests that if hedge ratios were merely a function of hedging costs, European hedge ratios on US investments should be a lot higher. Current (relatively cheap) hedging costs of 1.5% per annum using the three-month EUR/USD forward would be more associated with a 73% hedge ratio rather than the 64% seen in the latest data in June. This begs the question whether lightning will strike twice and some, presumably US-centric event, will trigger another dramatic European increase in dollar hedge ratios and a sharp dollar sell-off?
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