U.S. Stocks' Global Appeal Fades as Dollar Drops 8%

For years, investors in London, Paris, and Tokyo have enjoyed a near-perfect strategy: buying dollars and investing the proceeds in S&P 500 and Nasdaq stocks. The returns on U.S. stocks have far outpaced those in their home markets, and the continued appreciation of the dollar has doubled these returns.

However, this seemingly invincible trading combination has recently faced a crisis due to the global trade war initiated by Donald Trump. This year, the S&P 500 index has declined by 6%, but for investors who hold their returns in euros or yen, the losses have ballooned to a staggering 14% due to the significant drop in the dollar (the dollar index has fallen by nearly 8% this year). The abrupt and unpredictable shift in White House policies has left investors who have long viewed the U.S. as the ultimate safe haven feeling unprecedented uncertainty.

Benoit Peloille, Chief Investment Officer at a Paris-based wealth management company, bluntly stated, "This is a double whammy, you're losing on both stocks and currency."

In the past month of turmoil, despite the possibility of Trump retreating on trade war issues, many foreign investors have become aware of the risks associated with investing heavily in dollar-denominated assets. Currently, many investors are urgently adding currency hedging measures to their approximately $18 trillion U.S. stock investment portfolios, which account for nearly a fifth of the total U.S. stock market value.

Banks such as Morgan Stanley and Bank of America have reported seeing more clients purchasing protective assets against dollar depreciation. Alexandre Hezez of a Paris-based fund management company stated that his fund has already reached the maximum allowed hedging level because "everything has been turned upside down."

Those concerned about the decline in the dollar typically sell dollars in the forward market. For investors in Swiss francs or yen, the three-month hedging cost, if annualized, is approximately 4%; for euro investors, this cost exceeds 2%. While this hedging strategy can offset losses when the dollar falls, it also means forgoing potential gains from a rising dollar. Additionally, the ongoing hedging costs gradually erode the investment's return rate.

Shoki Omori, Chief Strategist at a Tokyo-based securities firm, vividly described the situation: "For managers who entered at higher exchange rates, every drop in the dollar against the yen feels like salt in the wound."

Options are another popular strategy, with euro-dollar contract trading hitting new records according to data from the U.S. clearinghouse. However, higher volatility also means more expensive hedging costs. For euro investors, hedging costs have increased by 15% since the beginning of the year.

A key question is whether this marks the beginning of international investors gradually exiting the U.S. market. Allianz Insurance Group believes that these funds seem to have no better alternatives. However, they also point out that the current $28 trillion in international investment balances could have a significant impact on exchange rates and global asset prices if even a small portion of these funds flow out of the U.S.

Many strategists believe that the euro will remain strong while the dollar continues to weaken, a situation that could persist for several years. George Saravelos of Deutsche Bank estimates that the euro-to-dollar exchange rate could rise to 1.30 by the end of 2027, a level not seen in a decade. Kirstine Kundby-Nielsen, a currency analyst at Danske Bank, also believes that Europe is becoming increasingly attractive to investors, predicting that the euro could rise to 1.22 dollars in the next 12 months.

Alexandre Hezez of a Paris-based fund management company is not taking any chances. He began building hedges before Trump announced retaliatory tariffs on April 2, when the euro-to-dollar exchange rate was around 1.05. Now, the euro has surpassed 1.3. "My currency hedging has covered part of the losses in the U.S. stock market," he said. "I plan to stick with this strategy in the short term, although I generally believe it to be counterproductive in the long run."