Currency Chaos: What It Means for Your Money

The US dollar is stumbling, trade tariffs are rising, and currency markets are shifting. Discover how global currency moves could affect your portfolio, and what smart investors are doing to stay ahead of the currency chaos.

Up the Creek

The US Dollar has been under the weather. It rose on the promise of domestic certainty towards the end of last year. The reality of trade tariffs has helped pull the rug from its feet, against the euro (above) and sterling (below).

Declines approaching 10%, as we see here, are big moves in currencies. What’s going on? And what does currency chaos mean for you?

American economic data is consistently poor. Government bond yields are up. Investors demand a yield of about 4.5% on ten-year bonds, reflecting the risk attached to the country. The Eurozone pays investors just 2.9% on the same type of bond. No wonder the credit rating agency Moody’s downgraded the US from Aaa to Aa1.

Yet the government is planning on borrowing unprecedented amounts. Jamie Dimon, JPMorgan Chase’s chief executive, warned the US bond market could ‘crack’ as a result.

We could go on – but you read the same news as we do.

Tariffs in the Dock

Sharp turns in US policy have created many victims. One that few seem to talk about is the Dollar.

Currency markets are particularly sensitive to government intervention, including tariffs. Remember the post-Brexit volatility in sterling? Or perhaps the plunge by the Chinese Yuan during the 2018–2019 U.S. China trade war.

If you’re importing or exporting from the US, you will probably know the effects well.

If you invest in currencies, this presents risks and opportunities you should know about.

But if you have funds, the main impact on you is the way it affects their performance. In a world where 61% of the value all shares and 40% of the world’s bond market are American, it’s going to make a difference one way or another.

FX Trading

For currency investors and FX traders the impact can be visceral. Clearly, the intention of tariff policy is to protect domestic industries, improve the trade balance and strengthen the currency. It’s a long-term goal that requires short term pain.

You can find a path through this jungle by focusing on macroeconomic indicators, inflation data and central bank decisions, and political developments. These indicators signal how tariffs influence currency values.

And, when one country diverges from another, as we’re seeing between the US and Western Europe, you can exploit opportunities. Of course, in the event of severe trade disputes, you might need safe haven currency. Once, that was the dollar, now it’s more likely to be the Yen or the Swiss Franc.

The sheer unpredictability of US trade policy is making coherent investing hard – and tit-for-tat tariffs only add to the uncertainty. And it doesn’t help that the White House and Federal Reserve can pull in different directions: if a government wants a weak currency to boost exports while the central bank raises interest rates to combat inflation, they can cancel each other out

Currency Chaos and Your Wealth

Most of our clients invest through funds. After all, we take an evidence-based approach to investing and evidence says spreading your risk in funds is a good thing. It also says you should invest internationally.

If you’re investing in equities or bonds, say, fund managers factor currency risk into their decisions. A stock might look attractive but if the currency pair (your currency versus the stock’s) isn’t going your way, that’s a less appealing investment for them – and you, their client.

In simple terms, a UK investor buying a US fund, with the dollar weakening against the pound, will see lower returns even if the US market performs well.

Despite this effect, what experts tend to find, over the very long run, is that rises and falls in currencies tend to have minimal positive and negative effects for a fund portfolio. That’s not all: the currencies also even out. It’s one of the things you pay an adviser for, to sort out risks like this for you.

If you’re investing in a specific currency fund… well, that’s exactly what you’re paying for.

We have plenty of expertise in managing investments, of whichever hue, through the most troubling times. Please get in touch at hello@firstwealth.co.uk or on 020 7467 2700.

This document is marketing material for a retail audience and does not constitute advice or recommendations. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.