Finance leaders scale back FX hedging as caution prevails in Q3

Senior finance decision-makers in the US and UK have scaled back their foreign exchange hedging activity in the third quarter, according to new research. Corporates reported the lowest hedge ratios and shortest hedging terms since the start of data collection by MillTech. However, a large majority expect to ramp up hedging again if interest rates increase over the coming year.

Hedging declines

Data show that the average hedge ratio fell to 46% in the latest quarter, down from a record 57% in the second quarter. The average duration of FX hedges also shortened to 5.8 months, compared to 6.5 months in the prior period. These represent the lowest levels since tracking began in the first quarter of 2024.

The report surveyed 250 senior finance professionals, including Chief Financial Officers and Treasurers, from corporations operating in both the US and the UK. The findings suggest that most firms are now taking a cautious approach, reducing exposure as they monitor monetary policy and economic signals.

Currency performance

The third quarter saw the US dollar unable to recover from its earlier decline, with ongoing fiscal concerns and expectations of rate cuts by the Federal Reserve. The dollar index hovered around 97.8 towards the end of August, reflecting ongoing uncertainty.

Sterling's performance was mixed. While global risk appetite and a softer dollar provided some support, the pound lost ground to the euro, with the EUR/GBP exchange rate moving towards 0.88 amid worries about UK growth and fiscal stability.

Meanwhile, the Bank for International Settlements' Triennial FX Survey highlighted an all-time peak in global foreign exchange turnover, with daily volumes over USD $9.6 trillion. Volatility and shifting policy expectations have contributed to this record trading activity.

Decision drivers

Central bank policy remained the most cited external factor for hedging decisions, named by 20% of respondents, followed closely by credit availability at 19%. Regional differences surfaced, with UK firms more likely to highlight credit conditions (24%), possibly reflecting current lending trends. US corporates distributed their concerns more evenly, referencing central bank policy (22%), geopolitical risks (20%), and inflation (18%).

"Corporates didn't abandon hedging, but they shortened durations and reduced their cover as they awaited clearer policy signals. As the year heads into its final quarter, central bank guidance and tariff-related developments are likely to remain the dominant forces influencing hedging strategies," said Eric Huttman, CEO, MillTech.

Future expectations

Expectations for rising interest rates are influencing corporate behaviour going into next year. In the UK, 79% of firms anticipate the Bank of England will raise rates, with 90% stating they will increase their hedge ratios if that occurs. In the US, 64% expect a Federal Reserve interest rate rise in 2026, and 96% plan to respond by increasing their hedges.

Trade policy and tariffs have also factored into outlooks across both regions. 92% of survey participants intend to extend both their hedge lengths and ratios into 2026. US companies show a slightly stronger inclination to boost cover than their UK counterparts, with 96% compared to 87% citing this as a response to global trade policies.

Central banks are expected to continue exerting a significant influence over hedging strategy planning, with fiscal and monetary developments closely monitored by corporate treasury teams.

"The overall picture from Q3 is one of measured caution," said Huttman.