US Dollar Dynamics: A Renewed Examination
Over the past decade and a half, the US dollar (USD) has experienced a pronounced trajectory of appreciation against various global currencies. This upward movement has been bolstered by its status as the premier reserve currency, intertwined with the broader narrative of ‘US exceptionalism.’
The outperformance of US equity markets, especially driven by the supremacy of technology stocks, has further cemented this paradigm.
The S&P 500 has reached numerous all-time highs in 2025, even amidst noteworthy volatility experienced earlier in the year. Notwithstanding these successes, the future of the USD appears contingent upon numerous challenges, warranting a reevaluation of the significance and implications of currency investment strategies within the context of portfolio management.
Geographical Listings vs. Currency Exposure
A prevalent misapprehension is that a company’s listing location directly implicates its currency risks. In actuality, it is the firm’s revenue channels and operational costs that delineate true currency vulnerability. For instance, Compass Group, a firm listed in London, generates substantial revenues in US dollars and euros globally.
Thus, a UK investor purchasing Compass Group shares is inadvertently assuming a multilayered currency exposure, which should be integral to the stock’s comprehensive investment consideration.
The ramifications of currency volatility can drastically influence a company’s profitability, contingent on its status as a net exporter or importer.
This premise was particularly evident following the Brexit referendum, when the British pound plummeted. Despite an uncertain domestic economic outlook, the FTSE 100 demonstrated remarkable performance, attributable in part to the global breadth of its constituent companies and the favorable currency translation effects.
Multinational corporations accruing revenues abroad, therefore, enjoyed insulation from domestic economic malaise and reaped benefits from a weakened currency, as foreign earnings became more lucrative when converted back into pounds.
For instance, Otis Worldwide, listed on the New York Stock Exchange, derived approximately 70% of its revenues from international markets last year, especially in China and Latin America. A declining dollar enhances the company’s profitability, as local emerging market currencies yield higher value upon conversion back to dollars, potentially inflating revenue figures in financial disclosures.
The Nuances of Export and Import Dynamics
The interplay of currency fluctuations critically impacts corporate profitability, depending on whether a firm is primarily an exporter or importer. For American exporters, a depreciating dollar is beneficial, facilitating higher repatriation rates from overseas sales and bolstering competitiveness in internationally traded goods.
The trade dynamics also underscore how China, as a net exporter, finds an advantage when its currency weakens—historically, the depreciation of the Chinese renminbi has ignited tensions with the US, often spotlighted as a catalyst for the escalating trade deficit.
In contrast, American importers like Walmart and The Home Depot favor a robust dollar, as it reduces costs when procuring goods priced in foreign currencies, thereby enhancing profit margins.
Further complexity arises when companies rely on imported raw materials to assemble products destined for export. Many enterprises adopt currency hedging strategies to navigate these risks effectively. A nuanced understanding of how a firm’s supply chain and consumer demographic interact with currency fluctuations is indispensable for sound investment decisions.
Constructing a resilient portfolio necessitates diverse holdings that can benefit from varying currency scenarios.
Navigating Currency Risk
Currency considerations are paramount when scrutinizing both risks and prospects associated with individual securities within investment portfolios. Given the intricate effects of currency on corporate profitability, while currency hedging can mitigate adverse movements, it remains an imperfect discipline that can yield certain benefits.
It’s likely that the hedge will not perfectly align with the currency exposure across the portfolio.
Nevertheless, the costs associated with hedging, along with the opportunity costs related to advantageous currency movements, must be balanced against potential benefits. The inherent complexity of currency dynamics suggests that hedges may not accurately reflect the overall portfolio’s exposure.
A wide-ranging exposure to global currencies is critical for diversification. Over the long term, it’s expected that currency fluctuations will exert diminishing influence if appropriately integrated into a sustained investment thesis.
However, when the foundational selection process has inadvertently led to substantial currency risks within diverse asset portfolios, strategic hedging may be implemented to align with client objectives.
The Hedging Dilemma
For global investors, currency dimensions constitute a significant aspect of the investment landscape. Solutions are not universally applicable; the decision to hedge exposure is contingent upon each client’s portfolio objectives and requirements.
In recent years, we have capitalized on both the robustness of the US market and a resilient dollar amid economic turbulence.
There will be periods when hedging against currency fluctuations proves advantageous, while at other times it may detrimentally affect returns. Hedging functions both as a risk management strategy and a tactical avenue to add value. Recently, however, we’ve adjusted our holdings to a moderate underweight in dollar exposure relative to the strategic norm.
As global conditions shift and the economic environment continues to evolve, it is imperative to assess prevailing trends and the ramifications of US policy, incorporating both direct and indirect currency exposures into investment analyses and portfolio constructions.
Conclusion
Tom Santa-Olalla is a senior associate partner at Sarasin & Partners.
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