According to BNY's Geoff Yu, global portfolios currently exhibit elevated exposure to the US Dollar (USD), driven by strong buying activity in both equities and bonds, which has generated significant rebalancing signals [1]. The USD was identified as the best-bought currency, with a marginal flow score more than twice that of the Japanese Yen (JPY), indicating that cross-border dollar exposure is at a record high [1]. Equity and fixed-income ownership in the US remain elevated, while hedge ratios are described as low, further amplifying the need for increased hedging [1].
US equities posted a modestly positive marginal return score, and the combination of strong dollar buying and equity gains has produced a large, combined rebalancing signal [1]. At the end of last week, equities accounted for 59.5% of total portfolio holdings, a level close to the early-July peak prior to the recent sell-off in memory-chip stocks [1]. Relative to fixed income, equity exposure is now at a record high, though the fixed-income rebalancing signal is weaker than that for equities [1]. Despite this, elevated US bond holdings still create a clear need for more hedging [1].
BNY notes that the recent decline in US equities towards month-end will reduce total dollar exposure and ease some immediate rebalancing pressure, but existing positions remain lightly hedged [1]. Concerns over potential equity outflows should encourage further dollar hedging, according to the bank [1]. BNY's recommendation is to increase FX hedges rather than sell US assets outright, as this is seen as the most efficient way to reduce risk given the current high allocations to US assets [1].
The overall message from BNY is that global exposure to US assets remains historically high, and portfolios still need to reduce risk through increased FX hedging, even as some rebalancing pressure may ease with falling US equities [1].
CONCLUSION
BNY highlights that global portfolios are heavily exposed to the US Dollar, with both equity and bond allocations at elevated levels. The bank recommends increasing FX hedges to manage risk, as hedge ratios remain low and outright selling of US assets is not advised. Despite some easing of rebalancing pressure due to recent equity declines, the need for additional hedging persists.