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Global foreign exchange trading has reached a new record. Daily turnover is now close to 9.6 trillion dollars, according to recent data. This rise shows that investors are looking for safer places to put their money and reacting quickly to changes in global markets. Many are trying to protect their portfolios from sharp currency moves. For UK savers who hold US or Asian stocks in ISAs and pension pots, these swings can affect returns almost as much as the performance of the companies themselves.
In This Guide
Dollar Strength Still Dominates Global Flows
The US dollar remains the most important currency in global finance. Even after years of debate about reducing reliance on it, the dollar still appears in about 89 per cent of all FX trades in 2025. This share has barely changed, even as central banks move in different directions and new trading hubs grow. The dollar keeps its lead because it is easy to trade, widely trusted and backed by the world’s largest economy.
Recent uncertainty over US interest rates has made the dollar even stronger. Investors turn to it when inflation rises or political risks increase. For UK investors, this matters. Many international portfolios hold more dollar exposure than people expect, even when the companies involved operate across several regions.
A Slow Rise in Competing Currencies
Some parts of the FX market are starting to change. Trading in the Chinese yuan has been growing, helped by its wider use in commodity deals and regional investment flows. A few medium-sized currencies have also gained ground. This has come mainly at the expense of the euro and sterling, which now make up a smaller share of global reserves and cross-border activity.
The shift is slow, but it still affects investors. Portfolios that once relied mainly on dollars and euros now hold more exposure to emerging currency groups. These currencies can move in very different ways when central banks follow separate rate paths or when geopolitical tensions rise.
What Currency Risk Means for International Portfolios
Currency risk is the change in an investment’s value caused by movements in exchange rates. It matters whenever a portfolio holds assets priced in another currency. A stronger pound can reduce overseas gains. A weaker pound can increase them. In fast markets, these moves can feel unrelated to company results.
UK investors saw this with US tech stocks. As sterling recovered from its post-mini-budget lows, dollar-based profits shrank even though many US companies reported strong results. A similar pattern appeared in Asia. Japanese stocks rose, but yen weakness often reduced the final return once converted back into pounds.
These examples show how currency shifts play a major role in the real performance of globally diversified portfolios.
Diversification Meets Concentration
Investors diversify internationally to spread risk. Yet global portfolios often end up leaning towards the dollar. Many world indices are dominated by US companies. Large firms outside the United States also price goods, sign contracts or borrow in dollars.
This creates concentration risk. A portfolio that looks balanced across regions may still depend heavily on a single currency. Wealth managers say this can weaken the benefit of diversification, especially when US interest rate policy moves in a different direction from that of the Bank of England.
Hedging And The Rise Of Currency Overlay Strategies
Hedging offers one way to manage these swings. Investors can use forwards or futures to lock in an exchange rate for a future date. Larger institutions often rely on currency overlay strategies. These operate alongside an existing portfolio and adjust currency exposure using a range of hedging tools. The aim is to reduce volatility without altering the underlying investments.
Hedging is never free. Investors face fees and the risk of giving up gains if the currency moves in their favour. For ISA and SIPP savers, the choice is about balance. Hedging can smooth returns, but heavy use can eat into long-term performance. Hedged fund classes may also carry higher charges, which need to be checked before investing.
Demand for currency hedging has climbed sharply this year. The shift reflects large swings in sterling and a wider acceptance that interest rate cycles have become harder to predict. Many wealth managers say clients now pay far closer attention to FX exposure when building global portfolios.
Why FX Volatility Has Picked Up
Currency markets have become sharper and more unpredictable this year. One major reason is that central banks are moving in different directions. The US Federal Reserve has held interest rates higher than the Bank of England and the European Central Bank. Higher US yields attract global investors, which pushes more money into the dollar and increases market swings.
Geopolitics also plays a big role. Trade disputes, new tariffs and changes in shipping routes have forced companies to rethink how they move goods. When supply chains shift, firms often adjust their currency hedging. These changes can create more volatility in FX markets.
There are broader risks as well. Concerns about government debt, busy election calendars and climate-related disruptions have grown. Traders follow these issues closely. Even small political or economic signals can trigger sharp moves in major currencies.
What International Investors Can Do In 2025 – 2026
Currency specialists say awareness is the first step. Portfolios should be reviewed to understand how much exposure sits in dollars, euros, yen, or emerging markets. Heavy dollar positions may be a deliberate choice. They may also be an accidental result of following major global indices.
Hedging can help investors with significant non-sterling exposure or those close to major financial milestones, such as retirement. Some managers favour partial hedging, which reduces volatility without removing currency effects entirely. Multi-currency funds can also diversify exposure, although the results depend on the manager’s approach.
Long-term investors often view currency swings differently. FX moves can skew performance in any single year, yet they tend to even out over time. For these investors, heavy hedging may limit the benefits of holding assets around the world.
The Outlook For 2026
Currency risk will stay important for global investors in 2026. The dollar is still likely to be the main currency, as markets remain heavily linked to the United States. Ongoing geopolitical tensions also keep money flowing into safe and liquid assets.
For UK investors, the picture will depend on interest rate decisions in London and Washington, changes in global trade and the political calendar. These forces will influence how strong or weak sterling is. Whatever happens, currency moves will continue to have a clear impact on the real returns from international portfolios.
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