Big hedging of dollars for clients could test banks' capacity, senior UBS trader says

• A 5-percentage-point rise in hedge ratios for all foreign holders of U.S. assets would imply roughly $1.5 trillion of dollar selling, potentially exceeding available bank balance sheet capacity
• Investors currently hedge approximately 48% of their U.S. dollar assets, with ratios fluctuating between 46-50% over the past year according to Barclays estimates
• Banks providing hedging services may need to exit other trades quickly to free up funds and meet client demands, potentially leading to selective client access during capacity constraints

Summary: Dollar Hedging Surge Could Strain Bank Capacity

The U.S. dollar's continued depreciation is driving increased investor demand for hedging that could test banks' structural capacity to provide these services, according to Ben Pearson, UBS's global head of G11 short-term interest rate trading.

Key Market Developments

The dollar declined nearly 10% against major currencies in 2025 and is down an additional 2% in January 2026, driven by U.S. policy uncertainty. This weakness has prompted investors to seek greater protection for their U.S. holdings.

Critical Data Points

• The global FX market handles nearly $10 trillion in daily transactions
• Investors currently hedge approximately 48% of their U.S. dollar assets, according to Barclays estimates
• Hedge ratios fluctuated between 46-50% throughout 2025, peaking after April's tariff shock
• A 5-percentage-point increase in hedge ratios would trigger roughly $1.5 trillion in dollar selling

Market Implications

Pearson warned that a sudden surge in hedging activity could strain the financial system's capacity. Banks providing hedging services may need to rapidly free up capital by exiting other positions to meet client demands. This could force dealers to make "difficult choices" about which clients receive access to their balance sheets.

The situation is particularly concerning given the scale of potential demand relative to available bank capacity. While the industry is exploring alternative products and solutions, the structural limitations remain a key risk factor.

Companies Mentioned: UBS (primary source), Barclays (data provider)

Sector Impact: Foreign exchange markets, banking, asset management