The Dollar’s Drift: Why It Matters and How Hedging Helps

What’s driving the dollar lower?

Since Trump took office in January, the dollar has weakened for a multitude of reasons:

• Tariff Uncertainty: Sweeping tariffs announced earlier this year disrupted trade flows and heightened fears of retaliation, prompting investors to reduce dollar exposure as a hedge against policy-driven volatility.
• Institutional Risk: Political pressure on the Federal Reserve and questions over fiscal governance have raised doubts about US policy credibility, undermining confidence in the dollar as the world’s reserve currency.
• Investor FX Hedging Behaviour: Rather than selling US assets, many foreign investors have increased currency hedging via swaps and forwards, reducing the need to hold dollars directly and putting steady downward pressure on the currency.

This trend has continued into early September, driven by softer economic data.

Why do currency moves matter for investors?

Currency moves can be just as influential as equity or bond performance in shaping portfolio returns. For a UK-based investor holding US assets, a stronger dollar adds to returns when translated back into sterling, while a weaker dollar detracts. This effect can be significant; FX (Foreign Exchange) shifts of 5–10% in a year are not unusual but they can offset or amplify underlying investment performance.

Currencies also interact with broader markets. A weaker dollar can be supportive for global equities, particularly in emerging markets where dollar-denominated debt burdens ease. Commodities, typically priced in dollars, also tend to find support when the currency softens. Conversely, dollar strength often tightens global financial conditions, raising risks in more fragile markets.

The role of GBP hedging

For portfolios denominated in sterling, currency hedging provides a way to smooth out these swings. By hedging US dollar exposure back into GBP, investors can strip out much of the volatility linked to exchange rates and focus on the underlying performance of their holdings. In recent weeks, with the dollar drifting lower, hedged investors have been shielded from currency losses that would otherwise have weighed on returns. Read more on currency hedging here.

The dollar’s weakness this year is a reminder that currencies are a key channel through which macroeconomic shifts ripple into portfolios. For sterling-based investors, hedging US exposure is not just a defensive measure but a way to align outcomes more closely with strategic goals. As markets remain sensitive to every data release and central-bank signal, keeping an eye on FX alongside equities and bonds is critical for navigating the months ahead.

The Noise

• Whilst at the beginning of the week US stock markets fell slightly after the US Labour Day holiday, they ended the week hitting a new all time. European markets were mostly steady, though Eurozone inflation rose to 2.1% in August, the first reading since April that has been above the European Central Bank’s 2% target. While stocks had reached record highs earlier this summer, this short-term pullback highlights ongoing sensitivity to economic and fiscal developments.

• Global bond markets continue to be under pressure. In the UK, long-term borrowing costs are at their highest level since 1998, driven by concerns over the economy and global interest rate trends. In the US, 30-year government bond yields have climbed to around 5%, reflecting worries about government debt and fiscal sustainability. These moves make borrowing more expensive but offer higher potential returns for investors willing to hold bonds.

• Commodity markets have seen mixed moves this week: Oil prices rose slightly as investors anticipated steady global demand, energy markets remained sensitive to geopolitical developments and supply disruptions, and precious metals prices have risen, continuing to act as a hedge during periods of uncertainty.

The Niche

Did you know that there are now more Exchange Traded Funds (commonly referred to as ETFs) listed in the US than there are individual stocks!