On global markets, demand for currency protection has grown noticeably: more and more participants are building dollar-hedging mechanisms into their portfolios. The reason is simple — uncertainty about the Fed’s rate trajectory, mixed economic signals, and sharp moves in the FX market are amplifying volatility. Against this backdrop, hedging is no longer seen as an «optional extra» but increasingly as a core element of risk management.

What drives demand for hedging

The first driver is the heightened swings in the dollar’s exchange rate against major currencies. Even short-lived surges can significantly shift portfolio performance tied to the dollar, and for investors outside the US this directly impacts results in their local currency. Additional pressure comes from diverging expectations about inflation and the pace of economic cooling: markets constantly reassess the odds of a policy shift by the Fed, and every reassessment is reflected in FX pricing.

The second factor is corporate and institutional year-end budgets. Large players seek to lock in exchange rates before reporting dates, ensuring predictability of cash flows. This increases activity in the derivatives segment, while risk managers tighten requirements for covering open currency exposures.

What instruments are used

Protection from dollar fluctuations today is achieved through several methods. Before choosing a specific tool, investors weigh their planning horizon, target hedge ratio, and acceptable costs.

• forwards to lock in the rate for certain dates
• currency swaps to redistribute liquidity and risk
• options (call/put) for asymmetric protection without a hard rate lock
• rolling hedges with regular rebalancing of the protection ratio

Most active are foreign funds with non-resident bases, exporters and importers with dollar revenues or costs, as well as managers of mixed portfolios where the dollar serves as the operational currency but reporting is done in another. Private investors focused on steady cash flows tend to favor partial hedging to keep some exposure to potential dollar strength.

The cost of protection and common mistakes

Hedging is not only about reducing risk but also about costs: dealer margins, rollover expenses, and the time value of options. If set up incorrectly, the «insurance policy» can eat away a substantial portion of returns.

Most distortions occur in three areas:

• excessive coverage ratios that erase upside when the dollar rebounds
• mismatches between hedge horizons and cash-flow or investment plans
• attempts to «catch the bottom or top» instead of following disciplined rules, which increases price risk

The optimal approach is to set a target hedge corridor, calculate protection costs across the rollover cycle, and establish conditions under which the coverage ratio is adjusted automatically. This simplifies management and reduces emotional decision-making in volatile periods.

How strategies are shifting

With the end of the third quarter, managed flexibility comes to the forefront. Investors increasingly combine linear and option-based tools: part of the FX risk is closed with forwards timed to reporting dates, and on top of that a «safety net» of options is added in case of force majeure. This «two-tier» structure helps contain costs while still preserving upside from favorable currency moves.

Another visible trend is abandoning the «zero or 100 percent» approach. Range targets have gained traction: for example, keeping coverage between 40–70% with adjustment steps triggered by predefined signals. This reduces reliance on a single entry point and makes the return profile more resilient to market surprises.

What to watch in the coming weeks

The future trajectory of demand for dollar hedging, judging by the current market picture, will be shaped by US macro data and central bank commentary. Any signals about the pace of economic cooling or inflation path are quickly translated into a reassessment of FX expectations and the cost of protection. For real-sector companies, dollar-denominated supply and payment schedules remain crucial: the closer the large settlements, the stronger the incentive to lock in the rate early.

In private portfolios, focus is shifting to «laddered» expiry dates: instead of one large deal, investors increasingly use a series of smaller ones spread across months. This makes results less dependent on timing and allows finer adjustments to news flow and reporting cycles.

The market is moving from occasional measures toward systematic hedging with clear rules and a defined cost budget. For those whose flows or assets are heavily dollar-based, it is wise to set a target hedge corridor in advance and a mechanism for automatic adjustments: this way, protection remains protection, rather than turning into another source of volatility and extra expenses.