Foreign investors are buying more US stocks, especially in the tech sector, as the US equity markets keep rising. However, the US dollar is still weak despite this influx of foreign investment. Compared to other countries like China, Germany, Italy, Canada, and Japan, the US stock market isn’t performing as well. For instance, Japan’s Nikkei index has increased by 32% this year. Notably, 80% of new equity purchases by foreign investors in the US are hedged against currency risk. This strategy helps reduce their exposure to the dollar and is uncommon for this decade.

Foreign Investors Remove Dollar Exposure

Foreign investors are reducing their dollar exposure by selling an equivalent amount of currency to limit foreign exchange risk. This trend is likely to continue as the Federal Reserve may cut interest rates further, making it cheaper to hedge against the dollar. Currently, foreign investors are excited about US stocks, particularly in technology, while distancing themselves from the dollar. This unusual situation presents a unique trading opportunity. Recent data from September 2025 shows that the Nasdaq 100 has surpassed 21,000 points, while the US Dollar Index (DXY) has fallen below 102, a level not seen consistently since early 2024. The weak dollar coincides with a record high of 80% of foreign equity purchases being hedged, meaning many are actively selling dollars. For our equity positions, this suggests we should focus on potential gains without full exposure. Using call options or call spreads on tech-focused ETFs like the QQQ allows us to benefit from the rising stock market while managing risk. Selling put spreads at levels below the current market price can also generate income, supported by the belief that strong foreign buying will help maintain stock prices.

Betting Against The Dollar

On the currency side, now is a good time to bet against the dollar. We should think about buying put options on dollar-tracking ETFs like UUP or shorting USD futures contracts directly. This approach aligns with the strong hedging activity that is pressuring the currency. This situation is becoming even more favorable because the Federal Reserve is expected to lower interest rates soon, making it cheaper to hedge against dollar risk. The recent August 2025 inflation report indicated a core CPI of 2.8%, which gives the Fed some leeway to ease policies. This combination of a dovish Fed and strong, hedged foreign investment is reminiscent of the trends we observed in late 2023. The CBOE Volatility Index (VIX) is currently at a relatively low 14, meaning options are cheaper than they were earlier this year. This low cost makes it a good time to build positions that could benefit from rising stock prices and a falling dollar. We should keep a close eye on the upcoming Fed meeting since the CME FedWatch Tool already indicates an 85% chance of a rate cut, meaning any surprises could greatly affect the market. Create your live VT Markets account and start trading now.

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