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Donald Trump spent his time on the campaign trail and imagined this would be the key to unleashing the great renaissance of American manufacturing.
We should give the man his payment. Few people thought it was possible to raise the world’s most important currency at a lower price. This points to the US’s long-term control over the global economy and markets. Still, through the magic of fundamental uncertainty and the erosion of American basic values and institutions, he successfully engineered a 7% reduction. A stunning gambit.
Whether this will help our efforts to support our industry is a long-term question. The bet needs to be “not really” for now. The obstacle for all other businesses, especially foreigners, is investing in American people and equipment in this age of increasing uncertainty. But that’s not what investors are thinking at the moment. Instead, Trump has transformed fund managers around the world into currency traders.
Many stock investors have thought little about forex risk for years. Why bother to do it? During the 2010-2024 American exceptionalism era, US-based investors overwhelmingly placed their money to work from home. They rode dizzying heights in the waves of big tech, taking the near-zero possibility that an explosion in the well-known, unpredictable currency market could leave a mark on the value of their investment. Jim Caron of Morgan Stanley Investment Management tells us that many of his clients have 3% of their portfolio invested outside the US.
Elsewhere, investors not only rode the same big wave of technology, but also rode a smooth 40% rise in the dollar on the trade-weighted scale of the Federal Reserve.
It’s difficult to grasp the exact degree of non-US investors protecting themselves against a match of dollar weakness in recent years. Clearly, all portfolios are different, but the hedge rates seem to be low. For example, an analysis from BNP Paribas suggests that hedge rates for dollar assets held by Dutch and Danish pension funds have recently sunk or near lows. The bank believes that the eurozone pension fund industry holds up to $770 billion in unsowed dollar exposure.
The market movements in 2025 so far have been focused on the mind here. US stocks have recovered reasonably well since dragging the key indicator, the S&P 500 into positive territory this year since the tariff-related shock in early April. But that’s the dollar. In euro terminology, the index has also dropped by more than 7% this year. This has also been reduced due to widespread evaporation of trust in American institutions under Trump 2.0, as it has declined due to expectations of US economic debilitation. Because of offsetting the situation in the dollar reserve currency, it is struggling under the new regime.
European stocks, on the other hand, are working very well. This is because some German governments, in combination with the central bank of adjustment, are intended to spend their paths to get out of trouble. However, in dollar terms, performance sparkles even more, allowing dollar-based investors to be brave enough to amplify revenues overseas.
Analysts now often say the biggest question they receive from investor clients is how to manage the risk that the dollar continues to fall and you can eat into your portfolio.
Stock and bond investors know that the stocks and bonds you buy can go down as well as running. (If you don’t, you probably should find another job.) This remains the biggest risk for your portfolio. However, an analysis from Bank of Canada RBC shows that currency-specific risks as slices of overall portfolio risk have risen across the world outside the US, particularly in Europe, Australia and Canada, with the US dollar taking up a large amount. For euro-based investors, currency movements account for almost a third of the total risk.
How investors deal with this depends on where they are. For example, hedging with larger, more aggressively traded currencies is easier and less expensive. However, RBC believes that a 5% increase in dollar hedges will be around $20 worth of dollars sold over time.
A massive, sudden dollar drop would be bad news for a number of reasons, but at least our assets and exports would look like bargains. But we’re not there yet. Instead, the progressive and enduring weakness of the dollar is another reason why investors doubt that American exceptionalism can make a comeback: maintaining slices of future allocations at home.
katie.martin@ft.com
