The dollar's decline, particularly in April, was not driven by investors divesting from US assets. Instead, it was caused by investors with large, unhedged dollar exposures belatedly adding hedges. This involves selling dollars in the spot or forward markets, creating downward pressure without actual asset sales.

Investors have been holding unhedged US dollar assets to capture both high yields and currency appreciation, a speculative strategy traditionally used for emerging market local currency bonds. This parallel indicates a shift in risk perception, where US assets are no longer seen as a pure safe haven.

While still profitable, FX carry trades have become more cyclical and less of a diversifier. They now exhibit a high correlation (~0.5 beta) with the S&P 500 and offer significantly lower yields (7% vs. 11-12% previously), increasing their risk profile in a potential market downturn.

Offering daily liquidity while pursuing a multi-year investment strategy creates a dangerous duration mismatch. When investors inevitably demand their cash during a downturn, the long-term thesis is shattered, forcing fire sales and destroying value. A fund's liquidity terms must align with its investment horizon.

The success of the current EM FX carry trade isn't driven by wide interest rate differentials, which are not historically high. Instead, the strategy is performing well because a resilient global growth environment is suppressing currency volatility, making it profitable to hold high-yielding currencies against low-yielders.

Foreign inflows into Japanese equities are high, but the FX hedge ratio is only 14%, far below the 50% seen during the Abenomics period. J.P. Morgan estimates every 1% rise in this hedge ratio could push USD/JPY 3 yen higher, representing a significant and overlooked bearish catalyst for the yen.

German swap spread movements are being driven more by technical factors than macro fundamentals. A primary driver is the unwinding of long-end interest rate hedges by Dutch pension funds. This flow is causing significant steepening in the 10-30 year swap curve and is expected to continue.

The U.S. dollar's decline is forecast to persist into H1 2026, driven by more than just policy shifts. As U.S. interest rate advantages narrow relative to the rest of the world, hedging costs for foreign investors decrease. This provides a greater incentive for investors to hedge their currency exposure, leading to increased dollar selling.

Citing a lesson from former Goldman Sachs CFO David Viniar, Alan Waxman argues the root cause of financial crises isn't bad credit, but liquidity crunches from mismatched assets and liabilities (e.g., funding long-term assets with short-term debt). This pattern repeats as investors collectively forget the lesson over time.