Dollar Asset Holding and Hedging Around the Globe

We analyze a large number of industry- and company-level filings of global institutional investors to provide the first comprehensive estimates of foreign investors' U.S. dollar (USD) security holdings and currency hedging practices. We find that foreign investors increased their holdings of USD securities by six fold over the past two decade, and showed preference for debt over equities. After the financial crisis of 2007-09, foreign investors maintained persistent and high hedge ratios for their USD holdings despite significant and fluctuating deviations from covered-interest rate parity. We estimate that USD hedging volume by insurance, pensions and mutual funds amounts to \$2 trillion per annum. We benchmark foreign investors' USD holdings and hedging patterns using a mean-variance framework, and discuss important empirical drivers of USD allocation and hedging, including the role of the yield curve slope, spot exchange rate, and CIP deviations