De-Dollarization Trends & Portfolio Strategies

My post contentA New Phase in Global Currency Dynamics

Despite a strong rebound in many global asset classes, the U.S. dollar stands out as a notable underperformer in 2025. The Dollar Index (DXY)—which tracks the dollar against six major global currencies—has fallen nearly 9.8% year-to-date.

This drop has created a currency headwind for international investors. For example, while the S&P 500 has risen about 2.8%, the UK-listed Vanguard S&P 500 UCITS ETF (VUAG) has declined 6.3%, entirely due to exchange rate effects.

Why Currency Risk Now Demands Boardroom Attention

A weakening dollar complicates global investment returns. Since the U.S. represents over 62% of the FTSE All-World Index, many institutional portfolios carry a significant dollar bias—either directly or via USD-denominated funds.

When repatriating returns to a home currency (like GBP, EUR, or INR), currency depreciation can erode gains or amplify losses. In this context, FX risk has evolved from a background concern to a front-and-center portfolio threat.

Expert Insights: Strategic Repositioning Is Underway

Karen McMillan, a prominent market strategist, explains that the dollar’s recent decline is “an unwinding of prior overvaluation,” and warns that this adjustment may not be over. She notes that large institutions are reassessing their dollar exposures, and the implementation of these decisions could result in further dollar weakness.

Philip Chandler of Schroder Investment Solutions shares a similar outlook. While he remains bullish on U.S. equities in the long term, he cautions against complacency. Many investors are still overexposed to USD assets, and without proper currency management, their returns may face unwanted drag.

From Safe Haven to Strategic Rethink

Since the global financial crisis of 2008, the U.S. dollar became a default safe haven, alongside the Japanese yen and Swiss franc. UK investors, in particular, shifted toward USD holdings to hedge against global volatility.

But the macroeconomic landscape has changed. With monetary policy convergence, slowing inflation, and rebalanced growth expectations, the perceived supremacy of the dollar is now being re-evaluated.

What Should Investors Do Now?

To navigate this currency shift, investors may consider the following strategies:

✅ 1. Rebalance U.S. Overweight Positions

Trim USD-heavy exposure to reduce correlation risk and improve diversification.

✅ 2. Use FX-Hedged Instruments

Incorporate currency-hedged ETFs or mutual funds to minimize exchange rate losses.

✅ 3. Expand Currency Diversification

Allocate to assets in non-USD markets (like the Eurozone or Asia-Pacific) or invest in multi-currency portfolios.

✅ 4. Monitor Central Bank Policy Differentials

Pay attention to interest rate moves by the Federal Reserve, ECB, and Bank of England, as these influence capital flows and FX direction.

✅ 5. Engage Strategic Currency Overlay Managers

For large portfolios, active currency overlay strategies may provide both hedging and alpha opportunities.

Conclusion: Currency Exposure Is No Longer Passive

The dollar’s softening trajectory marks a strategic inflection point for global investors. Ignoring FX risk is no longer an option in today’s interconnected markets. Whether you’re managing institutional capital, a family office portfolio, or HNW client mandates, a proactive approach to currency risk is now essential.

In this new era of de-dollarization, success will favor those who combine global insight, FX awareness, and adaptive capital strategies.

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