As the world adjusts to the knock-on effects of Trump’s new tariffs, currency markets are playing an increasingly pivotal role in driving portfolio outcomes. Whilst currency exposure is often an after-thought for Australian investors, it can be a powerful lever for both risk management and performance enhancement.
In short, now’s the time to ensure currency is your portfolio’s friend rather than its foe…
Currency exposure impacts your investment performance in two key ways:
1. Return Enhancement or Erosion
For all investors with international exposure, unhedged gains (or losses) in foreign currency holdings are reflected in your portfolio returns.
For example, if you hold a US ETF and the AUD depreciates against the USD, your investment will benefit from a currency tailwind when converted back to AUD.
However, the opposite happens when you’re on wrong side of a currency move. In this example, a stronger AUD would mean your portfolio returns will be impacted by a weaker return from your US ETF.
2. Diversification & Risk Management
Diversified currency exposure can also serve as an effective risk management strategy.
Growing evidence suggests that selective currency exposure, rather than full hedging, can boost investors’ risk-adjusted returns, especially during periods of policy divergence like we’re experiencing now:
Source: Statista
For example, during local economic downturns or periods of political instability, foreign currencies often appreciate relative to investors’ domestic currency, helping to offset local equity market weakness.
So currency matters for all investors with international exposure.
Let’s break down the main currency trends at play, and how they could be tactically used to enhance your portfolio returns…
1. ↑ AUD – Modest Strength but Lagging Peers
For Australian investors, the Aussie dollar remains the currency which matters most.
The AUDUSD exchange rate has been hovering around 0.66 in recent weeks, benefitting from USD weakness and growing risk-on sentiment. However, the AUD has also been underperforming against the EUR, GBP, and JPY, which have been greater beneficiaries of USD weakness.
Source: MacroMicro
Investor Takeaways:
2. ↓ USD – Under Pressure from Debt and Policy Risks
The USD has been trending downwards in recent months, reflecting souring sentiment amid rising US debt concerns (Trump’s ‘One Big Beautiful Bill’ will add US$3 trillion to the U.S. Government’s debt pile), anticipated Fed rate cuts, and geopolitical tensions, particularly in the Middle East.
Source: MacroMicro
These issues are likely to dominate the short-term trend in the USD, suggesting further weakness is likely.
Investor Takeaways:
3. ↑ EUR – Relative Safe Haven
The euro has been benefitting from USD weakness and recently hit 1.18 against the USD, a level not seen since 2021. Beyond USD outflows, its rise has been supported by diminishing ECB rate cuts (from 4.5% to 2.15% over 15 months), and improved European economic growth prospects.
Investor Takeaways:
4. → GBP – Mixed Signals Amid Political Turbulence
The pound has recently strengthened against the USD (up to 1.38) but weakened versus the euro, reflecting uncertainty over Chancellor Reeves’ tenure, and the UK’s unstable fiscal situation.
Investor Takeaways:
5. ↓ JPY – Weighed Down by BoJ Caution
The yen has recently fallen from 142 to 148 against the USD because the BoJ signalled delayed rate hikes (now targeting October), while safe haven flows failed to materialise amidst stronger US equities.
Investor Takeaways:
In a macro environment marked by US fiscal disarray, diverging central bank policies, and regional uncertainty, currency is no longer a background actor. It’s a front-line tool for smart, global-minded investors.
💡For Australian investors, here’s the main takeaway: you should invest in hedged global funds and ETFs if you expect AUD strength; whereas you should invest in unhedged funds and ETFs if you expect AUD weakness. And of course, if you don’t have a view on the AUD, the best strategy is to hedge your currency exposure to ensure you aren’t exposed to any surprise risks.
By staying informed and flexible, you can use currency not just to protect your capital, but to enhance and elevate it.
The Fund objective is to achieve attractive risk adjusted returns over the medium to long-term while reducing the risk of permanent capital loss.
The Fund aims to provide long-term capital growth through a portfolio of global equities. The team uses a fundamental, bottom-up approach, driven by valuation, building a concentrated, 'best ideas', high conviction global equity portfolio.
The Fund invests in a portfolio of global equity securities and aims to generally follow a strategic asset allocation guideline of 0 to 10% in cash and 90 to 100% in global equity securities.
An ASX-quoted Active ETF providing exposure to a diversified portfolio of typically over 300 global listed companies through an active systematic investment approach.
Disclaimer: This article is prepared by Simon Turner. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.
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