According to BNY's Geoff Yu, international investors are aggressively reducing their exposure to the US Dollar as real-yield support has eroded following the July FOMC meeting [1]. The bank notes that aggregate US exposure among international investors, measured using a 40:60 equity/fixed-income portfolio net of dollar holdings, recently reached record highs, but the July FOMC meeting marked a clear turning point, leading to a sharp unwind in 'dollar exceptionalism' [1]. BNY estimates that if the adjustment is fully symmetrical, total dollar exposure could return to flat within roughly 12 weeks, potentially setting the stage for a significant regime shift in FX markets into Q4 [1].
The report emphasizes that while the dollar is under pressure, risks are differentiated by currency pair and asset class. US equities remain supported, and fixed income is more insulated due to stronger home bias, especially at shorter maturities [1]. BNY suggests that, barring a major policy misalignment, the current move should be seen as a healthy normalization of international exposure to US assets rather than a collapse in US exceptionalism [1].
In terms of strategy, BNY advises raising USD hedge ratios instead of cutting US assets outright, viewing the dollar's decline as part of a broader exposure normalization [1]. Unless there are significant changes in fiscal or monetary policy, the bank expects further curve steepening and continued normalization of dollar exposure to be the path of least resistance [1].
CONCLUSION
BNY sees the recent decline in US Dollar exposure as a normalization process following the July FOMC meeting, rather than a sign of waning US exceptionalism. The bank anticipates further normalization and potential FX regime shifts into Q4, with differentiated risks across asset classes and currency pairs.