Global investment landscapes have never been more interconnected, and as investors chase returns across borders, an often overlooked factor can dictate success or setback: currency exposure. Monitoring these risks is not simply a technical exercise—it can be the difference between meeting your objectives and underperforming benchmarks in volatile markets.

In this article, we explore why understanding and managing foreign currency fluctuations is critical for both fund managers and individual investors. By diving into recent 2025 trends, risk mitigation methods, and transparency standards, you’ll gain practical steps to safeguard and enhance your global fund returns.

What is currency exposure?

At its core, currency exposure refers to the risk that arises when assets denominated in one currency are subject to changes in exchange rates relative to a fund’s base currency. As global funds accumulate positions in multiple jurisdictions, fluctuations can boost or erode returns once profits are converted back into the home currency.

For example, if a U.S. fund holds European equities and the euro weakens against the dollar, local gains may translate into smaller dollar amounts. Conversely, a falling dollar can magnify overseas gains when repatriated. This dual-edged nature makes it essential to measure and manage exposure, not just local market performance.

How currency fluctuations affect fund returns

In 2025, the U.S. dollar has weakened by approximately 8.5% against major currencies through late May. This decline stems from concerns over ballooning deficits and slowing growth, prompting central banks to diversify reserves away from USD holdings. As a result, U.S. investors have seen overseas gains magnified upon conversion.

The Morningstar Global Markets ex-US Index climbed 14% year-to-date, while the U.S. benchmark remained roughly flat over the same period. That disparity highlights how exchange rate dynamics can accentuate or dampen portfolio performance beyond underlying asset returns.

Hedging arrangements can alter these figures, resulting in net exposures that differ from gross weights. Fully unhedged funds may experience higher volatility but stand to gain when the home currency weakens—underscoring the trade-off between stability and potential upside.

Assessing currency exposure: what to look for

Before investing, scrutinize fund documents for detailed currency breakdowns and hedging policies. Transparency is key—understanding both gross and net exposure levels helps predict how exchange rates will impact returns under different scenarios.

• Review annual and semiannual reports for explicit currency allocations and hedging ratios.
• Examine fund fact sheets to see real-time shifts in weights and targets.
• Check commentary from fund managers addressing currency risk management frameworks.

Additionally, look for stress-test scenarios or historical analyses illustrating past performance during significant currency moves. This context illuminates potential outcomes and informs whether a fund’s approach aligns with your risk tolerance.

Shifts in 2025: macro drivers behind currency exposures

Several factors have reshaped currency allocations this year. Heightened U.S. deficits and slowing GDP growth have pressured the dollar, encouraging funds to reduce USD weightings. Meanwhile, the euro’s retreat on growth concerns has prompted portfolio rebalancing toward developed and emerging market currencies.

Central banks outside the U.S. have accelerated diversification efforts, purchasing non-dollar assets to hedge reserve risk. That trend boosts demand for currencies like the Japanese yen and a basket of emerging market currencies, both of which have seen target weights rise in Q2.

In emerging markets, higher growth prospects attract more capital, but investors must brace for elevated volatility. Understanding these macro drivers helps explain why currency risk in global funds cannot be ignored—it is driven by fundamental economic shifts as much as by portfolio positioning.

Risk mitigation strategies for managers and investors

Effective currency risk management hinges on a combination of strategic planning and tactical tools. Below are core approaches fund managers and individual investors can employ:

• Diversification across regions and currencies to reduce concentration risk.
• Natural hedging by aligning asset and liability cash flows in the same currency.
• Forward contracts to lock in future exchange rates for predictable repatriation.
• Options contracts for flexible protection against adverse moves at a premium.

Additionally, currency-focused ETFs can serve as quick hedging instruments, while risk-sharing agreements in private markets split fluctuation costs between counterparties. Choosing the right blend depends on cost considerations, expected volatility, and portfolio objectives.

Transparency and ongoing monitoring

Regularly reviewing currency exposures is essential to react to market changes. Funds should disclose reinvestment policies, hedging levels, and target ranges in periodic communications, empowering investors to stay informed.

Regulators and industry bodies advocate robust risk management frameworks, including continuous identification of currency risks, regular stress testing, and clear reporting. Embracing these standards fosters trust and helps investors gauge how well their capital is protected against unpredictable currency swings.

Ultimately, proactive monitoring and transparent disclosure transform currency exposure from a hidden threat into a managed factor—one that can be navigated with knowledge, discipline, and the right tools.

By taking charge of currency exposures, investors unlock a deeper understanding of their global fund portfolios and position themselves to capitalize on opportunities—or cushion against risks—driven by ever-shifting exchange rates.