Dollar Asset Holdings and Hedging Around the Globe

We collect and analyze a large set of industry- and company-level filings from global institutional investors to provide the first comprehensive estimates of foreign investors’ U.S. dollar (USD) security holdings and currency hedging practices. We document that foreign investors’ USD holdings expanded six-fold over two decades, driven in large part by increased portfolio allocations. Following the 2007-09 financial crisis, mutual funds, insurance companies, and pension funds raised their USD hedge ratios by 15 percentage points, with total FX hedging demand reaching $2 trillion by 2019. USD hedging demand varies significantly across currency areas and banking systems. Using a mean-variance framework, we benchmark investors’ currency hedging practices and identify expected FX returns as a key driver of hedging decisions, beyond considerations of variance minimization. Finally, we show a strong correlation between hedging activity and the cross-section of CIP deviations, underscoring the role of constrained financial intermediaries in currency hedging markets.