By Paul Hannon


Investors are seeking more protection against the risk that the U.S. dollar will weaken during future periods of stress in the global economy, a process that is likely to be gradual and weigh on the value of the currency, the Bank of England said Wednesday.

In its twice-yearly report on the stability of the financial system, the BOE warned that the risk of sharp falls in prices of risky assets remains high after the rebound that followed President Trump's decision to pause big raises in tariffs, which had sent markets tumbling.

The BOE said that while the financial system showed resilience during the period of volatility that followed the April 2 announcement of big tariff increases, the episode provided further evidence of a break in an historical pattern that saw the U.S. dollar strengthen at times of stress.

Investors who had previously relied on that "historical correlation" to preserve the value of their U.S. assets were now moving to protect themselves against a fresh weakening of the currency should there be further periods of stress, the BOE said.

"Market contacts report that foreign investors have been increasing their hedging of currency exposure on U.S. assets in recent weeks by selling dollars and buying home currency," the BOE said.

The U.K.'s central bank said the "slow moving nature" of the investors involved means that process would likely be gradual, but could contribute to a further weakening of the dollar.

"This shift in hedging behavior may contribute to downward pressure on the dollar on a continuing basis," the BOE said.

The BOE also advised market participants to take account of the breakdown in the historic patterns when planning their response to future periods of stress.

"Market participants should consider the implications of further shifts in this historical correlations when managing risk," it said.

The BOE said investors may be unpleasantly surprised by the end point for tariffs as the Trump administration continues to threaten higher duties on imports from the many countries that have yet to reach an agreement with the U.S.

"The broad-based tightening in risk premia since April 9 may in part reflect a perception among market participants that the largest trade-related downside risks have been removed following the U.S. announcement of its 90-day tariff pause," the BOE said. "However, eventual outcomes on trade policy remain unpredictable."


Write to Paul Hannon at paul.hannon@wsj.com


(END) Dow Jones Newswires

07-09-25 0555ET