Currency risks in global equity portfolios

Currency risks in unhedged global equity portfolios can be material to returns. As historical relationships between equities and currencies such as that between US equities and the US dollar can change quickly, investors may need to revisit hedging decisions periodically.

• Currency risks in unhedged global equity portfolios can be material to returns, outcomes we have seen during January-April 2025 for unhedged US equity allocations
• Given the dominance of US assets in benchmark equity and fixed income portfolios, the impact of relative US dollar moves on portfolio returns can be large
• As historical relationships such as that between US equities and the US dollar can change quickly, it may be necessary to revisit hedging decisions periodically

Amidst all the challenges global equity investors have faced in 2025 thus far, US dollar weakness is a critical, and somewhat unexpected, one. US equities posted steep losses year-to-date (YTD) through April 2025, as we highlight in the May 2025 Performance Insights reports. To some extent, those losses have been the result of a downbeat outlook on US equities. But US equity losses have been exacerbated for non-US investors by unfavorable currency moves. This insight focuses on the impact of relative currency moves on equity returns and underscores the need to focus on currency risk embedded within unhedged global equity portfolios.

The US dollar’s performance YTD has been unexpected. The anticipated tariff policies of the new US administration were expected to put upward pressure on the dollar with tariff imposition dampening US imports and the relative demand for foreign currencies. In fact, we saw a preview of this right after the US presidential elections in 2024 when the dollar surged during November and December. However, YTD through April 2025 the opposite happened, when most global currencies strengthened relative to the dollar (Exhibit 1).

A further puzzle is that during times of market stress the US dollar tends to be one of the safe-haven assets that investors flock toward. Again, the opposite happened during the recent market turmoil. In April, which was a particularly volatile month for global equities, other haven currencies such as the Swiss franc and Japanese yen strengthened (versus the US dollar and other global currencies), but the dollar weakened broadly.

The impact on unhedged global portfolios of changes in the dollar’s relative value can be significant. US equities constituted over 60% of an equity portfolio that tracked the FTSE All-World global equity benchmark as of April 30, 2025 (Exhibit 4). In addition, many portfolios are overweight US equities given the US’s outperformance of other regional equities over the last decade and the promise of AI which has fueled the US tech rally over the last two years. Similarly, global credit is also dominated by US high yield and investment grade credit. Hedging is a way to reduce portfolio risk by eliminating the currency risk and taking on  equity or fixed income risk alone.

Historically speaking, the US dollar has provided a natural hedge (to some degree) to US equity exposure. Exhibit 5 illustrates how. It shows the rolling 36-month correlation between the FTSE USA index and the DXY US dollar index. For the most part, over the last 20 years, this relationship has been negative, i.e. generally speaking, when US equities have fallen the US dollar has risen in value to some degree.

This relationship has seen sharp changes in the past, such as during the 2007-08 Global Financial Crisis when the correlation rose sharply (as asset correlations tend to do during crises) and then fell deeper into negative territory, potentially buffering some of the US equity losses at the time for global investors. Since the end of 2024, we have observed the 36-month correlation spiking. In fact, during February – April 2025, the direction of returns on both assets was the same (Exhibit 6).