US Dollar: Exposure normalizes as real rates fall – BNY

BNY’s Geoff Yu highlights that international investors are aggressively cutting Dollar exposure as real-yield support erodes following the July FOMC meeting. The bank sees the Dollar decline as a normalization of previously extreme U.S. asset holdings rather than a collapse in U.S. exceptionalism. FX risks are differentiated by pair, with U.S. equities still supported and fixed income more insulated.

Dollar decline and FX regime risks

"Aggregate U.S. exposure among international investors, measured using a 40:60 equity/fixed-income portfolio net of dollar holdings, recently reached record highs. The July FOMC meeting marked a clear turning point, and the unwind in “dollar exceptionalism” is now proving equally sharp. If the adjustment is fully symmetrical, we estimate total dollar exposure could return to flat within roughly 12 weeks, setting the stage for a significant regime shift in FX markets into Q4."

"The dollar is clearly under pressure, but the risks remain differentiated by pair and asset class. U.S. equity exceptionalism remains intact, while stronger home bias in fixed income means the marginal impact of overseas hedging should be smaller, particularly at shorter maturities. Barring a major policy misalignment, we see the current move as a healthy normalization of international exposure to U.S. assets."

"In FX, continue to raise USD hedge ratios rather than cut U.S. assets outright, while treating the dollar decline as a broader exposure normalization, not a collapse in U.S. exceptionalism."

"Unless fiscal or monetary signals change materially, the path of least resistance remains toward further curve steepening and a continued normalization of dollar exposure."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)