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Sift through the filings of pension funds and insurers around the world and one thing stands out: some of the biggest holders of United States assets have little protection against a weaker dollar, leaving the currency at risk of steeper declines if sentiment suddenly turns.

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Across markets including Japan, Canada and Taiwan, these investors hedged just 41 per cent of their foreign-currency exposure as of June 30 — the lowest since at least 2015 — according to Bloomberg calculations using data from six markets where such figures are available. While not a complete picture, it offers a glimpse into how the sudden rush last year to hedge against dollar losses triggered by President Donald Trump’s global tariff rollout has faded as the U.S. currency slowly stabilized.

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In cutting back their hedges, investors are returning to an approach that had worked for much of the past decade. The dollar tended to rise, or at least hold up, when markets turned volatile, cushioning losses on U.S. stocks and bonds when they’re converted back into investors’ home currencies. And with hedging expensive, there was little incentive to pay for protection.

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The risk now is that two pillars underpinning that strategy — high hedging costs and the dollar’s haven status — are being challenged at the same time.

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The greenback is down about 2.3 per cent this quarter and has weakened against most G10 peers as investors revive the debasement trade, the view that U.S. policies will erode the currency’s value. Treasury Secretary Scott Bessent’s moves to support the yen and contain rising U.S. yields have fuelled those concerns, as have doubts over whether Federal Reserve Chair Kevin Warsh will raise rates to curb inflation amid Trump’s push for lower borrowing costs.

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Hedging protects investors from currency swings by using derivatives to sell the greenback for their home currency. Because U.S. assets make up a large share of global portfolios, increased hedging effectively means more dollar selling.

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“Given the scale of foreign holdings of U.S. assets, it doesn’t take a dramatic change in positioning to matter,” said Laura Cooper, the London-based head of macro credit at Nuveen, which oversees US$1.4 trillion. “Foreign investors hold a sizeable stock of US assets, so even small shifts in hedge ratios can drive meaningful FX flows.”

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A five-percentage-point increase in hedge ratios would translate into around US$230 billion of transactions, according to Bloomberg estimates based on $4.6 trillion of foreign-currency holdings across the six markets, which also include Australia, Denmark and Finland.

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The estimate excludes major markets such as the United Kingdom and euro area, but the countries covered still represent a significant slice of U.S. asset holdings. Japan is the world’s largest foreign holder of U.S. Treasuries, accounting for about 10 per cent of overseas holdings, while Canada and Taiwan rank among the top 10.

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The factors that drove hedging down from more than 50 per cent over the past four years are starting to shift.

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The rate gap that made hedging expensive is shrinking. Three-month dollar hedge costs for yen-based investors have slid to a four-year low of 2.75 per cent, from a high of six per cent in October 2023. For euro-based investors, they’ve dropped to a two-year low of 1.32 per cent.