The US dollar looks overvalued. Should individual investors care?
Some things are a lot more important to professional investors than everybody else.
As usual, last month’s Morningstar Investment Conference saw some non-consensus views aired in the panels – Simon Mawhinney’s pitch for Woodside and Caroline Cai’s view on a bombed-out call centre stock to name just two.
By contrast, one thing that few panellists seemed to disagree with is that the US dollar looks expensive against the Aussie dollar relative to history.
Westpac’s Head Economist Luci Ellis, for example, showed the slide below and said that while the US dollar could strengthen further in the near-term, she sees an eventual reversion towards the mean as inevitable.
Figure 1: USD price relative to AUD and Euro over time. Source: Westpac, Luci Ellis’ presentation at Morningstar Investment Conference 2025.
If Ellis is right, then in a sense I am speaking to you from the future. Because as a British expat holding several US shares in a sterling retirement portfolio, I have already experienced the effects of a large downwards move in the US dollar versus my home currency.
While the Aussie has climbed around 3% versus the US Dollar year to date, the British pound has clawed back more than 7%. That is a huge move in foreign exchange (FX) land, and has been a big headwind to anybody holding assets in USD but counting returns in pounds.
In case this becomes a bigger story in Australia than it is currently, I thought I’d share how I view currency risk as an individual investor. Let’s start with the impact this has had on my returns in 2025 so far.
How FX moves have impacted my returns in 2025
Like many Morningstar users, I track my portfolio through the Sharesight account that I get as part of my membership. All of the data below is as I saw it reported in my Sharesight account as of May 30.
So far in 2025, my UK-domiciled retirement portfolio has posted a 1.38% capital gain and delivered 1.43% in dividends. The value of my portfolio in pound sterling, however, has fallen by 1.01%. This is because of a -3.83% contribution from FX.
Figure 2: My portfolio’s returns in GBP from Dec 31 2024 to May 30 2025. Source: Author/Sharesight
As I hinted at earlier, this is largely down to my US-listed holdings. Running a report for my exposure by currency shows that roughly 49% of this portfolio is in US dollar denominated shares. Even if these shares have risen, their sterling value has risen less.
Figure 3: The currency exposure of my UK retirement portfolio as of May 30. Source: Sharesight.
CME Group (NAS: CME) is a good example at the stock level. The stock is up around 22% so far in 2025, but my holding is only worth 15% more in sterling. Similarly, my US listed shares that have fallen so far in 2025 have posted an even bigger loss of value in pounds.
It is hard to argue, then, that FX hasn’t had a big effect on my portfolio’s returns so far this year. In the (unrealistic) scenario that the pound was flat against the other currencies in my portfolio, my total return would be positive 3% or thereabouts rather than negative 1%.
A big deal or not?
This isn’t really a major issue for me. We’re talking about a five-month period when I have thirty-plus years until retirement. I also don’t need to report yearly numbers to anybody or show them that I am doing a good job. But what about those who do?
For professionals, anything with the potential to deliver a 4% headwind over 6 months is a big deal. After all, they will report and often be judged on their yearly performance. And if FX has been in the headlines, you can bet that clients will have questions about how the professional navigated the moves.
This is why FX was a hot topic at our conference for advisers. It’s also why FX stories will always play in the financial pages, which usually approach matters of investing from a professional’s viewpoint and not that of an individual investor.
What could you do about it?
Talk of potential FX headwinds inevitably leads to suggestions of what can be done about it.
For investors that get exposure to non-Aussie equities via ETFs, you might see discussions of using a hedged ETF rather an unhedged one. Hedged ETFs will hold stocks in whatever currency they are listed in, plus holdings in derivatives or swaps that nullify changes in value between different currencies.
As an investor who cares about the return in Aussie dollars, this would protect you from an appreciation in the Aussie dollar reducing the value of your foreign holdings. This will usually be reflected by you paying a slightly higher management fee for the ETF.
Don’t forget that hedging would also stop you from benefiting if – as has been the case for the past few years – other currencies (most notably the US dollar) appreciate in value against the Aussie. You can call it protection if you want, but it is really a one-way FX bet.
Another approach for ETF investors – and one that is used by the Lifecycle option I use for super – is to have part of the global equity allocation hedged and part of it unhedged. My provider, for example, targets 60% unhedged and 40% hedged.
For those of us investing in individual shares, it isn’t that simple. Some may suggest trying to diversify away from expensive looking currencies, perhaps by buying shares listed in other regions and in other currencies. As I will explain now, though, I’m not really convinced that prioritising this is worth the effort, expense or risk of being wrong.
Should individual investors worry about FX?
Before I get into this, I know that investors with less time until retirement may find a potential FX headwind scarier than I do. I am not minimising that. Obviously, I would also prefer my portfolio to be worth more in sterling or Aussie dollars than less.
I’m just not sure that taking a stance on FX and shaping your portfolio around it is really worth it. Especially if, like me, you mostly invest in individual shares and are simply trying to benefit from owning great companies or assets for a long period of time.
First of all, let’s talk about how tough it is. FX movements are hard to call and even harder to time. They are driven by a few key variables related to monetary or political matters, plus hundreds (if not thousands) of other variables such as what is going on in commodity markets.
Moves in FX are also a double-edged sword. The effect on the value of your portfolio in Aussie dollars on a certain day may be very different to the second-order effects being experienced by the companies you own shares in.
An example from my portfolio
My investment in Swiss healthcare company Roche (SWX: ROG) has provided an FX tailwind so far this year. But has a strong Franc benefited Roche’s business and, by extension, me as a long-term shareholder? Absolutely not!
For years, a strong Swiss franc has been the bane of Roche’s existence. Sales to buyers outside of Switzerland (i.e. most of them) are less competitive on price and also have a harder time moving the needle for Roche’s revenue and profit growth, which are measured in francs.
Figure 4: Roche constant currency versus Swiss franc revenue growth. Source: Roche financial reports
If the Swiss franc was to weaken, it is possible that benefits in Roche’s underlying business would blow any FX headwind for the shares out of the water. How many US listed companies could see something similar happen to them?
Enough to worry about already
When drawing the line between speculation and investment, Benjamin Graham said that speculators “try to profit from market moves” while investors merely “endeavour to buy suitable securities at suitable prices.”
Not only would I argue that trying to time FX moves is rather speculative. I’d also say that living up to Graham’s definition of investing – buying suitable securities at suitable prices – is hard enough as it is. Why add another layer of complexity without any guarantee of success?
This seems especially true when you consider that as individual investors, we are not expected to have all the answers. Nor do we do need to try and optimise our returns over short time periods in the fear of losing clients.
FX moves may benefit your portfolio in some ways and harm it in others. I doubt, however, that they will be the main reason for your success or failure over a long period of time.
Disclosure: The author of this article own shares in CME Group and Roche.
