Euro-Dollar: Hedging Demand a Formidable Magnet to Higher Highs

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A multi-month Dollar hedging exercise can pull EUR/USD higher.

Rising hedging flows from European pension funds are emerging as a powerful force behind the euro’s climb, with analysts pointing to structural shifts in FX risk management as a key driver likely to push EUR/USD toward new highs.

Recent data from the Dutch National Bank show that Dutch pension funds, the largest in the EU, shifted their FX hedge positions dramatically between Q4 2024 and Q1 2025, moving from a net short €10.5 billion to a net long €7.5 billion. Over that period, EUR/USD rallied 3.8%.

The pair has since risen another 6.8%, suggesting that hedging activity likely continued during Q2 amid escalating U.S. trade tensions.

“If European investors continue to increase FX hedge ratios, it will likely provide further support to EUR-USD,” says Clyde Wardle, Senior EM FX Strategist at HSBC, adding that the behaviour of Dutch pension funds often signals broader euro area investment trends.

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Pension funds have for years mainly been unhedged on U.S. Dollar-denominated investments, as the Dollar has tended to rise in 'risk-off' episodes in which stocks fall.

However, the recent breakdown in the Dollar's correlation with domestic markets (i.e. falling in tandem with falling stocks) means investors now need to hedge against USD weakness.

This involves selling the USD using various foreign exchange market products, which ultimately weakens the Dollar in the process.

Brent Donnelly of Spectra Markets said "the EUR theme has solid footing" as European pension funds ramp up dollar hedging in response to "angst and animosity towards hostile U.S. policy."

Above: A falling U.S. stock market (top) in the first four months of the year was accompanied by a falling Dollar. This compounds losses for overseas holders of U.S. equities.

George Saravelos, Global Head of FX Research at Deutsche Bank, says his team's analysis of global hedge ratios identified Taiwan as "the epicentre of this massive dollar long held by institutional investors."

The surge in the Taiwan dollar (TWD) in May has intensified scrutiny from global funds reassessing their dollar exposure.

"We should be under no doubt that global pension funds and life insurers are watching closely how the unwind of this dollar imbalance plays out," Saravelos said, pointing to the likelihood of continued FX rebalancing in the quarters ahead.

Jefferies Bank’s W. Brad Bechtel says hedging-related flows are unlikely to be short-lived.

"They don’t just happen in a few days or weeks," he explains, adding that while some flows may accelerate around quarter-end, the broader repositioning could be a "multi-month or multi-quarter process."

This aligns with the outlook from Roberto Mialich, FX strategist at UniCredit Bank, who sees continued Euro strength ahead.

“EUR-USD is set to remain firm and to move towards new YTD highs above 1.16,” he says, citing strong structural support from repositioning flows.