The strength of the US equity market and tight credit spreads in investment grade and high yield indicate that the dollar decline in the first half of 2025 was not driven by foreign selling of US assets.
Instead, the decline in the dollar was likely driven by hedging activity, as foreign investors, after decades of not hedging their US investments, began hedging some of their dollar exposures.
With Section 899 behind us and the Fed keeping interest rates higher for longer, dollar hedging activity is likely to slow down.
Our chart book, available here, discusses the upside and downside risks to the dollar.
Sources: Bloomberg, BIS, Haver Analytics, IMF, Apollo Chief EconomistNote: 1-year yield differential = 1-year German government bill minus 1-year US T-bill. pp = percentage points. Sources: Bloomberg, Macrobond, Apollo Chief Economist
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