Dollar hedge ratios at 11-year low, Bitcoin may be affected

Global institutional investors' hedge ratios on dollar positions have fallen to their lowest level since 2015. The depreciation of the dollar may lead investors to pursue new hedge transactions. As of the end of June, pension funds and insurance companies in Japan, Canada, Taiwan, Australia, Denmark, and Finland had only hedged 41% of their foreign currency-denominated assets against currency risk. This ratio was 56% in 2020. Australia has the lowest hedge ratio at 27%, while Canada stands at 38%, Taiwan at 43%, Japan at 46%, Denmark at 49%, and Finland at 51%. This strategy provided advantages for investors during periods of dollar strength, but the depreciation of the dollar makes unhedged positions risky. The Bloomberg Dollar Spot Index fell from 101.39 on July 1 to 99.29 on September 3, losing 2.1% in value. An increase in hedge ratios among institutional investors could heighten selling pressure on the dollar. A 5-point increase in hedge ratios among investors in the six countries included in the study could require approximately $230 billion in futures selling. The decline of the dollar could create a cyclical effect by increasing hedge transactions. This situation may lead to increased selling of U.S. Treasury bonds and rising bond yields. For Bitcoin, the potential for the dollar and U.S. Treasury market to signal in different directions is significant.

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