Currency Hedging? Consider the Asset Class
Anyone who travels abroad frequently has felt the impact of currency fluctuations. The price of your favourite hotel or restaurant can change from one trip to the next simply because of exchange rates. Currency shifts also affect investments outside your home market. Investing in foreign stocks means being exposed to the underlying currency as well as the stock itself. The 2024/25 financial year saw the Australian dollar appreciate by over 5% against other major currencies, detracting from the returns on international investments for an Australian investor. In periods of dollar depreciation, the reverse has been true.
A common question is whether to hedge this currency exposure. The answer may depend on the asset class and the investor’s goals. In the case of equities, volatility tends to be driven more by stock price swings than currency movements, so hedged and unhedged global equity portfolios have shown similar volatility over time. Whether to hedge or not may therefore be a decision driven by investor tastes and preferences.
Global bonds are different. The less volatile nature of bonds means that currency moves can have a bigger impact. Hedging currencies can thus meaningfully reduce volatility, which may be particularly valuable for investors who look to their bond allocations for stability.
International stocks and bonds can offer investors powerful tools for diversification. Whether or not to hedge the currency component should be considered in the context of the role they play in an investor’s asset allocation.
Impact of Currency Hedging on Return Volatility
1990–2024
Past performance is not a guarantee of future results.
This article originally appeared in Short N Sweet, a newsletter for Dimensional clients.
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