Since the start of the year, acute currency volatility has reminded investors of the importance of managing currency exposures. We expect further dollar weakness in the coming 12 months, with USDCHF forecast at 0.76 by June 2026. In that context, a seven-step approach can help investors align their portfolios with their objectives.
- Assess current currency needs - Investors must consider which currency is required for their spending needs. It typically corresponds to the currency of primary residence, but significant portions may be in foreign currencies for overseas travel, supporting relatives abroad, or maintaining international properties. Estimating the percentage of total spending in each currency over the next five years helps determine an appropriate short-term currency allocation. For example, a Swiss investor with a holiday home in Italy might spend 80% in Swiss francs and 20% in euros.
- Estimate lifetime currency mix - Spending habits and life circumstances evolve, affecting future currency needs. This may include children studying abroad or planned relocation upon retirement. By estimating the percentage of spending in each currency over the next 5 to 20 years, investors can align their portfolio's currency mix with long-term plans.
- Consider long-term and legacy needs - Legacy planning can further impact the currency allocation as beneficiaries may have different requirements, such as children settled in other countries or supporting charities abroad. For investors focused on preserving global capital value, a neutral mix of key currencies may be more feasible. This mix should aim to preserve long-term global purchasing power, considering factors like long-term valuations; safe-haven characteristics of a currency such as Swiss franc, the Japanese yen, and the US dollar; and a currency's share of global trading, such as the USD and the EUR.
- Scale time horizons for target allocation - A difficult task is combining weights to the different time horizons. The appropriate weighting depends on factors like age, certainty about future plans, and the importance of legacy goals. Younger investors with uncertain long-term plans may prioritize near-term needs, while older investors with established legacy intentions may focus on long-term allocations.
- Adjust for income, business assets, and debts - Investors should consider future income streams, business assets, and outstanding debts. Income expected in a particular currency can offset future spending needs, reducing the need for additional portfolio exposure. Conversely, debts in a given currency may require an increased allocation to manage the risk of currency appreciation relative to income or assets.
- The currency exposure should feel comfortable - Investors may adjust currency allocations based on investment convictions or emotional comfort with potential currency moves. A practical method is to assume a 20% depreciation in the largest currency allocation and assess the impact. If this scenario causes discomfort, the allocation may be too high; if met with indifference, it is likely appropriate.
- Implement the target currency mix - Once a target allocation is established, implementation is the next step. Practical approaches include using currency-hedged portfolios or shifting investment grade fixed income holdings into under-allocated currencies and hedging equity exposures. Moreover, sophisticated investors can employ currency forwards, options, and structured solutions for more flexible exposures.
Managing currency exposures is a dynamic, multi-step process blending quantitative analysis with qualitative judgment. A structured framework can potentially reduce risk, preserve purchasing power, and provide greater peace of mind. In today's environment, a practical, data-driven approach to currency management is essential for achieving financial goals and ensuring long-term financial security.
