Navigating Currency Risk in a Global Portfolio

Currency risk is one of the most overlooked threats to international investment returns. For global investors, understanding how currency movements affect portfolio value isn’t optional—it’s essential. Factors such as government administration and global events can significantly influence currency risk.

Here’s an instance of currency risk in action: A US investor places $100,000 in a European equity ETF tracking the STOXX 600 index in 2026. The stock index rises 12% during the year. Victory? Not quite. The euro depreciates 15% against the US dollar amid divergent central bank policies. When converted back to dollars, that investment totals only $95,262—a 4.7% loss despite strong local performance. Global events—such as policy changes, Brexit, or economic crises—can cause sudden currency swings, dramatically impacting investment outcomes.

At Third Act Retirement Planning, we help individuals with sudden wealth—inheritance, business sales, NIL deals, or legal settlements—steward global portfolios wisely for retirement and legacy. This article provides practical insights on managing currency fluctuations and building resilient investment strategies.

Understanding Currency Risk in a Global Portfolio

Currency risk, also known as exchange rate risk, occurs when the value of one currency changes compared to another, impacting the return on investments in foreign assets. It arises whenever you own assets denominated in foreign currencies while spending in dollars. Key macroeconomic factors such as interest rates, inflation, and GDP growth influence currency trends. Additionally, government administration policies—such as tariffs or fiscal measures—can also impact currency strength.

Here’s the mechanics: Suppose you invest in a Canadian stock that gains 10% locally. If the Canadian dollar weakens 18% against the US dollar during that period, your gain evaporates—potentially resulting in a loss. Investors holding unhedged foreign investments are affected by fluctuations in currency values, which can either add or detract from their overall investment returns. Changes in demand for a currency, driven by policy or economic expectations, can significantly influence currency values and investment performance.

Two types of risk matter:

• Translation risk: Paper gains or losses when marking investments to the dollar

• Transaction risk: Actual gains or losses when converting dividends or selling assets

Currency fluctuations impact global portfolios by introducing volatility, where a depreciating foreign currency can diminish or negate investment returns when converted back to the investor’s base currency. This affects international stocks, bonds, mutual funds, and ETFs alike. Companies with foreign operations may also see their reporting earnings compressed if the local currency drops against their reporting currency.

The Impact of Currency Fluctuations on Investment Returns

When investing in international stocks, investors are making two bets: one on the company’s performance and another on the underlying currency’s strength relative to their home currency. Both significantly affect returns.

Step-by-step example for 2025-2026:

1. Invest $100,000 in unhedged MSCI EAFE fund

2. Local equity gain: +8%

3. Currency drag due to the dollar's strength: -10.5% average

4. Combined return: approximately -2.9% when converting back to the dollar equivalent

A strong US dollar hurts returns from foreign investments, often turning what would be positive gains into negative outcomes after currency conversion. A weaker dollar boosts them. This extends to income streams—foreign dividends, bond coupons, and real estate rents all fluctuate when converted to dollars.

Historically, currency-hedged investment strategies have outperformed unhedged strategies, underscoring the importance of considering currency exposure in a diversified investment approach. Empirical data shows that currency-hedged indices can outperform unhedged versions by approximately 2.42 percent on an annualized basis, highlighting the effectiveness of hedging strategies in mitigating currency risk. Domestic-only portfolios avoid currency swings but concentrate exposure to the US economy, missing diversification benefits.

Hedged vs. Unhedged: Choosing Your Level of Currency Exposure

Unhedged exposure accepts full currency risk. Academic evidence suggests currencies often mean-revert over decades, but multi-year deviations are common. The USD remained overvalued versus the euro for nearly six years (2002-2008) per IMF data. When navigating currency risk in a global portfolio, it is essential to focus on the appropriate currency exposure strategy to achieve optimal portfolio outcomes.

Fully hedged exposure uses forwards or futures to neutralize currency moves. Returns then track underlying foreign assets in dollar terms. Hedging typically reduces volatility for most international investments—often 20-30% reduction according to CME data. Using currency-hedged ETFs allows investors to gain exposure to foreign assets while mitigating the impact of exchange rate movements on returns.

Tactical/partial hedging adjusts ratios based on market conditions. Active hedging involves adjusting the hedge ratio based on market signals and currency valuations to seek excess returns. A 50% hedge balances risk and opportunity.

Hedging techniques can protect investors from currency risk by using financial tools to lock in exchange rates, thereby reducing uncertainty from currency fluctuations. However, costs typically run 0.3-0.5% annually, and you forgo gains when foreign currencies strengthen.

Operational note: Check fund prospectuses for “USD-hedged” labels. Major fund families like Vanguard, BlackRock, and iShares offer hedged share classes with minimum investments starting around $3,000 for ETFs. The financial advice industry has historically overlooked currency exchange risk as a significant factor in international investing, making it even more important for investors to consider these options.

Practical Tools for Managing Currency Risk

Common hedging tools include forward contracts, currency futures, and options, which can help safeguard investments but may also limit potential gains if the market moves favorably.

• Currency-hedged ETFs: Funds like iShares MSCI EAFE Hedged (HEFA) target developed markets using monthly forwards, capturing approximately 95% of local returns with reduced volatility. When investors buy or sell foreign securities through these funds, currency fluctuations can significantly impact returns, especially when converting the proceeds back to their home currency.

• Global allocation funds: These blend hedged and unhedged sleeves behind the scenes, adjusting based on professional models

• Multi-currency accounts: Multi-currency accounts can help manage liquidity and reduce the frequency of conversions at disadvantageous rates—particularly useful for funding UK tuition or supporting ministry work in Latin America

• Forward contracts: Forward contracts lock in exchange rates for a future date, providing payment certainty for larger transactions

• Currency options: Currency options provide the right, but not the obligation, to exchange currency at a set price, acting as insurance against extreme moves

Natural hedging aligns costs and revenues in the same currency, minimizing the need for currency conversion. At Third Act Retirement Planning, we integrate currency risk management into our fiduciary investment process, coordinating with tax, estate, and charitable planning needs.

Special Considerations for Emerging Markets and Concentrated Currency Bets

Emerging market currencies—Brazilian real, South African rand, Turkish lira—exhibit 2-3x the volatility of developed market currencies. Political instability, inflation, and capital controls amplify risks. Trade policies, tariffs, and changes in imports can also influence currency strength in these markets, impacting investment returns as shifts in trade flows or import levels may cause currencies to appreciate or depreciate.

During the 2015-2016 EM crisis, MSCI Emerging Markets fell 15% in local currency terms but dropped 25% in dollars as the USD strengthened 10%. Such currency swings can quickly erode returns.

Diversifying investments across different currencies can help mitigate risks associated with currency fluctuations, as one currency’s decline may be offset by another’s rise. A diversified investment strategy that includes assets denominated in multiple currencies can provide a cushion against sudden currency shifts, reducing overall portfolio risk.

Avoid concentrated single-currency bets. Large foreign-currency cash positions without clear spending needs introduce speculation—not stewardship.

Aligning Currency Strategy with Retirement, Taxes, and Faith-Based Stewardship

Your retirement timeline, expected spending location, and healthcare plans influence appropriate foreign-currency exposure. Near-term retirees typically hedge 70-100% for spending stability. Investors are encouraged to allocate a portion of their portfolios to international exposure, with recommendations suggesting around 20 percent to enhance diversification and tap into growth opportunities beyond domestic markets.

Tax considerations matter: capital gains from currency moves affect liability, and foreign withholding taxes interact with currency changes in complex ways. Cross-border heirs, foreign properties, and charitable giving to international ministries introduce additional planning needs.

Biblical stewardship principles—prudence, diversification, avoiding speculation—frame currency management as wise oversight rather than gambling on the dollar’s direction. View currency strategy as part of an integrated plan encompassing retirement income, investment management, tax planning, and charitable giving.

Assessing and Monitoring Currency Risk in Your Current Portfolio

Follow this checklist to evaluate your exposure:

1. Inventory holdings: List all stocks, bonds, mutual funds, ETFs, and alternatives—identify which are denominated in foreign currencies

2. Review fund documents: Use fact sheets to determine hedging status (fully hedged, partially hedged, or unhedged)

3. Apply rules of thumb: Retirees often keep unhedged foreign exposure under 20%; younger investors may accept up to 40%

4. Set review rhythm: Reassess currency exposure annually alongside equity volatility and interest rate risks

5. Monitor financial news: Regularly follow financial news and market updates to stay informed about currency trends and geopolitical events that could impact your portfolio

6. Stress test: Model portfolio performance against 15% USD rise or fall scenarios

At Third Act Retirement Planning, we use professional tools like FactSet to measure dollar vs. non-dollar exposure and stress test against significant currency moves.

When to Seek Professional, Fee-Only Advice

DIY works for limited international exposure. Seek professional guidance when:

• Receiving a seven-figure inheritance

• Selling a business with international revenues

• Acquiring foreign real estate

• Managing large cross-border charitable gifts

A fiduciary, fee-only advisor differs fundamentally from commission-based salespeople. Our process includes discovery calls, in-depth analysis of currency exposure, customized portfolio policies, and ongoing monitoring.

The goal isn’t predicting the dollar’s exact path—it’s building resilience for purposeful retirement and lasting legacy.

Conclusion: Turning Currency Risk into a Managed Part of Your Stewardship Plan

Currency risk is unavoidable in global investing but becomes manageable when understood and addressed thoughtfully. The tools exist: hedged and unhedged fund combinations, diversification across markets and currencies, and alignment with retirement, tax, and legacy goals.

If you’ve experienced sudden wealth or are expanding global exposure in 2026, we invite you to schedule a conversation with Third Act Retirement Planning. Let us review your portfolio’s currency risks and help you build a strategy grounded in prudent stewardship.