Investors hope US rate cuts will lower FX hedging costs
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European investors in US assets set to boost hedge ratios as implied yields rise
As the US dollar has continued its fall after April’s tariff turmoil, foreign investors in US assets have had to make a trade-off between FX risks and high hedging costs.
The wide interest rate differentials between the US and Europe have meant rolling a one-month FX forward hedge can cost investors 3–4% annually. But with the market pricing the Federal Reserve to announce three cuts to interest rates over the next year, investors are hoping to take advantage of the decreasing costs to increase
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