For much of the past 15 years, the US dollar (USD) has been strengthening steadily relative to other currencies.
The dollar’s role as the world’s reserve currency has been a source of strength, compounded by the notion of ‘US exceptionalism’ as US equity markets have outpaced their peers over the long term – in part, due to the dominance of US listed global technology stocks.
Indeed, the S&P 500 has hit multiple record highs in 2025, despite significant volatility earlier in the year.
However, with the outlook for USD looking potentially challenged, it is worth revisiting the impact and importance of currency investment theses, and how it is considered and incorporated into portfolio construction.
Listed locally, earning globally
A common misconception is that the geographic listing of a company equates to its currency exposure. In reality, a company’s revenue streams and cost profile define true currency risk.
For example, a company like Compass Group, listed in London, earns much of its revenues across the world in US dollars and euros. As such, a UK investor buying Compass Group is indirectly taking on multi-currency exposure, which must be considered as part of the stock’s overarching investment thesis.
Currency fluctuations can significantly impact a company’s bottom line, depending on whether it is a net exporter or importer
This was notably demonstrated in the aftermath of the Brexit referendum, a period in which sterling depreciated rapidly. While the outlook for the domestic economy looked uncertain, counterintuitively, the FTSE 100 had a very strong year – partly due to the global nature of the companies within the index and the translation effect of currency.
Multinational companies generating overseas revenues were not only insulated from the weakened domestic outlook but benefited from sterling weakness as revenues generated overseas in other currencies were consequently worth more in sterling terms.
Similarly, lift manufacturer Otis Worldwide is listed on the New York Stock Exchange, but c.70% of its revenues were generated outside the US last year, notably in China and Latin America.
In this case, a weakening dollar is positive for the company’s return profile as it means the local emerging market currencies are worth more in dollar terms. When the company converts foreign earnings back into dollars, this may boost potential revenue and profit in its financial statements.
Margin makers and breakers
Currency fluctuations can significantly impact a company’s bottom line, depending on whether it is a net exporter or importer. US exporters benefit from a weak dollar relative to other currencies. A weaker dollar not only means overseas revenues translate into more dollars upon repatriation, but it also improves their competitiveness in global trade.
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As a net exporter, China benefits when its currency is weak. Historically, a weak Chinese renminbi has caused tension between the US and China, often cited as a catalyst to the dramatic trade deficit. President Donald Trump has previously even accused China of currency manipulation.
US importers, like Walmart and The Home Depot, prefer a strong dollar. They pay suppliers in foreign currencies and a stronger dollar makes those purchases cheaper, improving margins.
Further currency complexity is added when companies import raw materials to build a finished product for export.
Many companies will use currency hedging strategies to manage this risk. Understanding how a company’s supply chain and customer base interact with currency movements is vital. A well-constructed portfolio will have a diverse array of companies benefiting from varying currency movements.
Balancing currency risk
Currency is a crucial consideration when researching the risks and opportunities of each individual security within a portfolio.
Given the complexity of its impact on a company’s return profile, currency hedging is an imperfect art, but can offer advantages. It can help protect the value of international investments from adverse currency movements, reduce volatility from exchange rate fluctuations and allow investors to focus on underlying asset performance without being distracted by currency moves.
It is likely that the hedge itself will not perfectly match the currency exposure of the overall portfolio
However, the disadvantages of hedging also need to be weighed up. These include the costs incurred and the opportunity cost of the positive side of a currency move. Given currency’s complexity, it is also likely that the hedge itself will not perfectly match the currency exposure of the overall portfolio.
A broad exposure to global currencies is important for diversification, recognising that over the medium to longer term, currency movements should have less of an impact if foreign exchange is incorporated correctly into the longer-term investment thesis.
However, where our bottom-up security selection process has naturally introduced significant currency risk in multi-asset portfolios, we will implement a hedging strategy suitable to the needs of clients.
To hedge or not to hedge
For global investors, currency is a crucial piece of the investment puzzle. There is no one-size-fits-all solution, and whether or not to hedge exposure depends on a client portfolio’s objectives and requirements.
In past years, we have benefited from both the strength of the US market as well as a strong dollar in times of economic uncertainty
There will be times when hedging sterling will be beneficial and other times when it will have a negative impact. Hedging can be seen as a risk-management tool, as well as an area where we can add value tactically.
In past years, we have benefited from both the strength of the US market as well as a strong dollar in times of economic uncertainty. More recently, however, we have reduced our overweight dollar exposure in many portfolios to a slight underweight positive versus the strategic norm.
As global dynamics shift, and the economic landscape around us evolves, it remains crucial to analyse the prevailing environment and potential implications of US policy, incorporating direct and indirect currency exposure into our investment analysis and portfolio construction.
Tom Santa-Olalla is senior associate partner at Sarasin & Partners
