The rise in the 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 can influence spot exchange rates through CIP arbitrage. Using the capital ratios of (dealer) banks as a supply shifter, we show that the net derivative demand for dollar short positions by investment funds has a negative slope in the value of the dollar similar to the supply by dealer banks, but is more price elastic. This can explain why a dollar currency index and the net dollar hedging have an extremely strong negative correlation of −66% in the last decade, which represents a notable exception to the disconnect puzzle.