Australian Pension Fund Reducing US Dollar Exposure: Market Implications

Based on my comprehensive research, I can now provide you with a detailed analysis of the implications of major Australian pension funds reducing US dollar exposure for global currency markets and institutional investor asset allocation strategies.

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, Australia’s second-largest pension fund with A$353 billion (A$237.39 billion) in funds under management, has announced a strategic shift in its currency hedging approach. According to Reuters reports from January 20, 2026, ART holds approximately A$53 billion in US stocks and is while maintaining its US equity allocation [1][2]. This represents a significant departure from the historical norm where pension fund investors in US equities typically maintained minimal currency hedging.

The fund’s decision is predicated on several interconnected factors that institutional investors are increasingly factoring into their allocation models:

: Financial markets have priced in approximately 50 basis points of Federal Reserve interest rate cuts in 2026, while major economies including Japan and Australia are expected to lift rates, and Europe is anticipated to remain steady [1][2]. This policy divergence creates fundamental headwinds for dollar strength.

: Andrew Fisher, ART’s General Manager of Total Portfolio Management and Resilience, stated that “the U.S. dollar seems to be the one place where I think the U.S. administration is going to get what it wants, which is a weaker dollar,” noting that policymakers have made clear their desire for currency depreciation to improve US competitiveness [1][2].

: Ongoing trade tensions, including tariff threats on European nations, have contributed to market uncertainty, with the dollar easing against safe-haven currencies such as the yen and Swiss franc in recent weeks [1][2].

: The traditional paradigm of minimal US dollar hedging by overseas institutional investors—predicated on the assumption that the dollar would appreciate during negative shocks—is undergoing fundamental reconsideration. This represents a structural shift in how global investors approach currency risk management [1][2].

: As major institutional investors globally reassess their dollar exposure, the aggregate effect could contribute to downward pressure on the currency. J.P. Morgan Asset Management’s 2026 Long-Term Capital Market Assumptions (LTCMA) estimate that the US dollar is approximately 7% overvalued versus the EUR and 8% overvalued versus the GBP, suggesting systematic downward pressure absent new catalyst [3].

: Historical correlations between dollar strength and US equity outperformance are being recalibrated. According to J.P. Morgan analysis, in 2025, the S&P 500 returned 18% in local currency terms, but only 5% for unhedged EUR investors and 11% for unhedged GBP investors due to dollar depreciation effects [3].

: The US dollar proportion in a classic 60:40 portfolio (comprising MSCI ACWI and Bloomberg Global Aggregate Bond Index) increased from 44% at the start of 2011 to 57% by October 2025, reflecting prolonged US asset outperformance [3]. This elevated exposure necessitates more sophisticated currency management.

: According to State Street analysis, overseas USD hedge ratios have declined to historically low levels—reaching approximately 53% at their nadir in 2025, the lowest since 2016 [4]. The cost of hedging USD exposure remains significant, with foreign investors on average giving up around 1.5% of returns to hedge currency risk, though this cost is expected to decline in 2026 [4].

: Morningstar analysis suggests that for investors in countries with broadly comparable interest and inflation rates to the US (including the UK and Australia), a measured approach to currency hedging is warranted [5]. This involves considering partial hedging while avoiding overexposure to hedging costs.

: As articulated by ART’s Fisher: “We’re not going to change our allocation to U.S. equities, we’re just going to hedge more of the U.S. equities and unhedge more of the other equities… Our Japanese exposure might be fully unhedged and our U.S. exposure might be much more hedged than it has been in the past to try and get that balance right” [1][2].

: J.P. Morgan Asset Management anticipates gradual, orderly dollar declines in the base scenario, with fair value estimated at 1.26 USD/EUR and 1.48 USD/GBP by 2038, implying approximately 0.6% annual USD depreciation [3]. However, low-probability disorderly decline risks remain, potentially triggered by threats to Federal Reserve independence, widespread cryptocurrency adoption, or policies disrupting foreign demand for US Treasuries.

: The dollar’s traditional negative correlation with US equity returns—a hallmark of its safe-haven status—has weakened in 2025, with growing positive correlation to US stocks, potentially undermining the currency’s portfolio diversification benefits [3].

: Major institutions are recommending that investors:

1. Review currency allocations to ensure alignment with future liabilities and spending needs
2. Consider hedging US dollar exposure implicit in US assets
3. Evaluate opportunities in currencies expected to benefit from dollar weakness (EUR, AUD, NOK)
4. Utilize dollar-hedged equity strategies to protect against policy mistakes and disorderly depreciation [3][5][6]

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The Australian Retirement Trust’s strategic pivot represents a significant signal from a major institutional investor regarding dollar outlook and currency risk management. This development reflects broader institutional concerns about dollar valuation, monetary policy divergence, and the erosion of traditional hedging assumptions. For global institutional investors, the implications extend beyond currency markets to fundamental questions about asset allocation, risk management, and the evolving role of the US dollar in global portfolios. The aggregate effect of such strategic reassessments by major funds could contribute to sustained dollar weakness while simultaneously driving innovation in currency hedging instruments and strategies.

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[1] Reuters - “Major Australian pension fund trimming US dollar exposure on weakening outlook” (https://www.reuters.com/world/asia-pacific/major-australian-pension-fund-trimming-us-dollar-exposure-weakening-outlook-2026-01-20/)

[2] Reuters Daily Briefing - “Major Australian pension fund trimming US dollar exposure” (https://www.reuters.com/world/asia-pacific/major-australian-pension-fund-trimming-us-dollar-exposure-weakening-outlook-2026-01-20/)

[3] J.P. Morgan Asset Management - “A new path for the US dollar” (https://am.jpmorgan.com/no/en/asset-management/adv/insights/market-insights/market-updates/on-the-minds-of-investors/new-path-us-dollar/)

[4] State Street - “Market Signals and Shifts: What to watch in 2026” (https://www.statestreet.com/content/statestreet/jp/en/insights/market-outlook-2026)

[5] Morningstar - “What a Weaker US Dollar Means for Investors in 2026 and Beyond” (https://global.morningstar.com/en-ca/markets/what-weaker-us-dollar-means-investors-2026-beyond)

[6] UBS - “Reduce excess dollar exposure” (https://www.ubs.com/us/en/wealth-management/insights/market-news/article.2622631.html)