PHOTO: AFP/FILE

REUTERS, Orlando

The Trump administration scored a surprise win-win this year, as Wall Street boomed while the dollar fizzled. But a repeat next year is unlikely as the root of that sweet spot, dollar hedging, may be missing.

A weaker exchange rate is central to President Donald Trump and Treasury Secretary Scott Bessent’s vision of restoring the might of US manufacturing, increasing US exports, and narrowing the country’s huge trade deficit.

The administration got its wish this year, with the dollar index clocking its worst January-June period in more than half a century, plunging as much as 12 percent at one point, while the S&P 500 shrugged off the ‘Liberation Day’ tariff chaos in April and soared to new highs.

The key ingredient in this unusual mix was dollar hedging. Overseas investors baulked at Trump’s economic and foreign policy agendas early into his second term in office, but they still wanted exposure to the artificial intelligence-fueled equity boom. So they hoovered up US stocks, but hedged the currency risk by selling the dollar via derivatives contracts.

The dollar has been broadly steady since June, while Wall Street has moved ever higher, suggesting there may still be sufficient hedging activity capping the dollar’s upside.

In fact, more than 80 percent of US equity inflow from abroad is now hedged, according to Deutsche Bank. If true, that suggests there’s not much scope to increase.

Of course, no official hedging data exists, nor any singular method to measure it, resulting in a wide range of estimates, with Deutsche Bank’s approximation at the top end.

Strategists at JPMorgan reckon hedging demand has cooled in recent months as the apocalyptic trade war fears of earlier this year have faded and the dollar has stabilized.

They analyze net inflows into US equity exchange-traded funds domiciled abroad, assessing what percentage of this capital goes to currency-hedged versus unhedged ETFs.

There has been steady demand for both from foreign investors since July, but the flow in dollar terms has been significantly skewed to the much-larger pool of unhedged ETFs.

How will hedging demand shape up next year? If the world’s view of the dollar and the US darkens as it did early this year, investors are likely to maintain high hedge ratios, limiting the dollar’s upside even if foreign buyers retain their appetite for Big Tech-related equities.

On the other hand, the AI-driven ‘US exceptionalism’ narrative has re-emerged since mid-year. Just look at Nvidia’s recent $5 trillion valuation. If the US economy outperforms next year, foreign investors may have little reason to hedge at all.