Using contract-level data on U.S. bond funds’ currency forward positions from 2010–2023, we document that foreign investors dedicated to emerging markets (EM) bear substantially greater currency risk than their bond holdings suggest. On average, funds amplify their EM currency exposure by 14% through net long position in forwards linked to bond positions, and even more when including forwards without corresponding bond investments. This forward usage pattern is strongly related to the degree of capital control imposed by currency issuers, underpinned by a triangular relationship between capital flow restrictions, funds’ bond portfolio deviations from local currency benchmark weights, and net forward purchases. Meanwhile, for funds that sell local currencies forward overall, bond portfolio weights strongly predict forward sales, indicating an inelastic hedging demand for currency forwards. Informed by the empirical analysis, an equilibrium model featuring investor heterogeneity, capital flow restrictions and forward market segmentation is able to rationalize empirical properties of the forward premia of EM currencies.