The rise in net international bond positions of non-US investors over the last decade can account for the long-run surge in net dollar hedging positions in FX derivatives. The latter influence spot exchange rates through CIP arbitrage. Using intermediaries’ capital ratio as a supply shifter, we identify a price inelastic derivative demand by institutional investors and document that changes in their net hedging positions can explain approximately 30% of all monthly variation in the seven most important dollar exchange rates from 2012 to 2022.