How do equity managers deal with currency risk? They don’t, at least, not if they can avoid it. The Economist, somewhat tongue in cheek, suggested: “Forecasting earnings is already a pain. It becomes much worse when the task is to make forecasts for each company in a portfolio, before splitting costs and revenues by perhaps a dozen currencies, and then netting it all off against hedging arrangements made years ago by a now-retired treasurer. Unsurprisingly, such analysis is often dumped in the ‘too hard’ bucket.”
The publication makes a serious point: currency volatility adds an extra layer of complexity to an already challenging task. Recent and ongoing events are making managing that volatility potentially harder, and even more necessary.
As Katie Martin observed in the Financial Times, US equity investors “have barely thought about foreign exchange risk for years. Why bother?” Portfolios were largely domestic, and a sharp depreciation of the dollar simply wasn’t a pressing concern. Yet recent disruptions, tariffs, and broader policy uncertainties have shattered this complacency, neatly captured by the headline: “Dollar weakness is turning all fund managers into currency traders.”
A new FX landscape?
While portfolio managers might treat currency swings as a nuisance, for FX traders, those same movements are where the real work happens.
And 2025 has given them plenty to work with. In April, Bloomberg quoted one FX trader saying currency volatility “has been completely insane.” Around the same time, ING’s Head of Macro called the situation “not only chaotic, it’s crazy.”
As markets gradually adjust to the new normal of US policy swings, a new landscape of opportunity is emerging.
The US dollar’s decline as the global safe haven might suggest increased volatility. But paradoxically, the dollar has become less volatile during global risk events, making it less of a refuge for cautious investors.
Instead, its stability has made it more attractive as a funding currency for carry trades, where traders borrow cheaply in dollars to invest in higher-yielding emerging market currencies.
This shift is in some ways surprising: the currency losing its safe haven status is simultaneously gaining popularity as a cornerstone of carry trades, creating a new and somewhat counterintuitive dynamic in FX markets.
But as a recent Bloomberg report suggests, lower USD volatility has made the dollar more attractive as a funding vehicle rather than as a reserve asset. To quote the story: “A dollar-funded carry trade that’s long the Brazilian real, Mexican peso, Indian rupee, Indonesian rupiah, South African rand, and Turkish lira has returned 8% this year, according to Bloomberg calculations.”
This stands in contrast with other developed market currencies commonly used in carry trades: “Similar portfolios funded by the yen, euro, and Swiss franc have returned 2.6%, minus 3.3%, and minus 2.2% respectively.”
The demise of USD as global reserve currency may be overstated, but for now, at least, equity managers, FX traders and ordinary investors may need to rethink some of the dominant orthodoxies about currency risks.
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