Deutsche Bank: the dollar's growing reliance on equity inflows is a long-term risk for the currency

Strategists at Deutsche Bank warn that the US dollar's growing dependence on equity inflows could hurt the currency over the long run.

A fading advantage

In the past, foreign investors holding US stocks without currency hedges enjoyed a built-in cushion: when US equities fell, the dollar usually strengthened and offset part of their losses.

Now the dollar is increasingly tied to stock-market sentiment, and that inverse relationship is gradually weakening. As a result, holding unhedged US assets no longer offers the same diversification benefit.

The consequence: more hedging, a weaker dollar

According to Deutsche Bank, this shift could encourage foreign asset managers to raise their FX hedge ratios. More hedging means selling dollars forward, which could weigh on the currency.

George Saravelos, global head of FX research at Deutsche Bank, and his colleagues said further changes in the dollar–equity relationship will be a key factor in investors' future hedging decisions.

Who is most exposed?

Deutsche Bank reviewed the FX hedge ratios of pension funds and life insurers in more than 12 countries:

Status	Countries
Still relatively exposed to the dollar	Sweden, Switzerland, euro area
Have already adjusted significantly	Chile, Canada, UK

Why the dollar is supported for now

The report stresses that despite the reduced diversification benefit, high hedging costs and low FX volatility still encourage investors to keep their dollar assets. In other words, this is a structural, long-term risk for the dollar rather than an immediate trigger.

For traders: if the dollar–equity correlation turns more positive, US stock sell-offs may no longer lift the dollar as they used to, which matters for pairs such as EURUSD and USDCHF.

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Source: Deutsche Bank FX strategy research