Australian investors should reassess currency hedging as the outlook for the US dollar becomes less certain.
Low hedge ratios have worked well for many global equity portfolios. When markets fell, the Australian dollar often weakened, helping unhedged overseas exposure offset some losses. That has made foreign currency exposure useful in periods of stress.
This benefit may now be less reliable. The US dollar has been supported for years by its reserve currency status and safe-haven role, but that position is being questioned as fiscal, political and geopolitical risks increase.
Many portfolios now hold sizeable gains from unhedged US dollar exposure. Leaving those gains fully exposed may no longer be the best risk decision. Increasing hedge ratios could help protect returns if the Australian dollar strengthens or the US dollar weakens. The difficulty is timing. A large hedge increase can work against investors if the US dollar continues to rise.
That makes a more flexible approach relevant. Dynamic hedging can adjust hedge ratios within agreed limits rather than forcing a single decision at one point in time. This gives investors a structured way to respond to valuation, interest rate differentials and market conditions while keeping currency risk aligned with portfolio objectives.
Currency exposure has helped portfolios in the past, but it should not be left on autopilot. The next phase may require more active hedging decisions, clearer governance and better use of specialist currency tools.
Record plc (LON:REC) develops bespoke, high-quality, sophisticated solutions for institutional investors, a unique offering stemming from Record’s knowledge and expertise gained from its core currency hedging markets.
