Foreign investors are facing a sharp reversal as the once-reliable strategy of buying dollars and allocating heavily into S&P 500 (SPY, Financial) and Nasdaq (QQQ, Financial) stocks comes under pressure. A 6% decline in the S&P 500 has turned into a 14% hit for investors measuring returns in euros and yen, with additional losses from a weakening dollar. Firms like Group Richelieu and Prevoir Asset Management are moving to hedge US equity exposures, as volatility picks up and hedging costs rise. Morgan Stanley and Bank of America have both reported increased client activity in currency protection strategies, while options trading volumes tied to euro-dollar hedging are reaching record highs. This shift underscores growing unease among international investors about the risks of concentrated US dollar exposure.
While the dollar recently fell to a 16-month low, many strategists caution that the underlying fundamentals of US markets remain intact. For example, Alphabet (GOOG, Financial) continue to post strong results, with Alphabet generating nearly $80 billion in first-quarter revenue. Allianz SE analysts noted that the US still offers unmatched liquidity and corporate profitability, but warned that even modest withdrawals from America's $28 trillion international investment base could trigger broader asset price distortions. Deutsche Bank forecasts that the euro could appreciate to $1.30 by 2027, signaling a potential end to the era of US exceptionalism and reinforcing the need for investors to reassess currency risk within their portfolios.
The near-term outlook remains uncertain. Some investors, including Alexandre Hezez of Group Richelieu, have moved aggressively to build currency hedges to offset equity market volatility, even acknowledging the potential long-term cost to returns. Meanwhile, Danske Bank expects European assets to become more competitive, projecting the euro will reach $1.22 within the next 12 months. As the dollar weakens and political uncertainty rises, the shift in global investment patterns could accelerate, challenging long-standing assumptions about US market dominance and reshaping international portfolio strategies.
