If you own global investments while living in the UK, you take two rides at once: the ups and downs of the assets themselves and the zigzags of the currencies they are priced in.
That “FX” second ride can quietly amplify or offset returns, and it also shows up in day-to-day life through the price of holidays, imported goods, and school fees abroad. This post covers both sides.
Returns: the translation effect
When the pound strengthens against the US dollar, unhedged UK investors see the GBP value of US assets fall (all else equal). In 2025, for example, the dollar weakened and sterling strengthened, moving from $1.25 per £ at year-end 2024 to about $1.37 per £ by June 30, 2025 (roughly a -8.8% FX drag for a UK holder of USD assets over that period).
A quick illustration: if US shares rose +5% in USD while the $/£ rate moved 1.25 → 1.37, a sterling-based investor’s combined return would be:
Combined return ≈ (1.05 × 1.25/1.37) − 1 ≈ -4.2% in GBP.
The same asset, but a different result, purely because of the currency.
Should I hedge currency risk?
The case for leaving global equities unhedged is strong for long-term UK investors. Hedging can trim short-term volatility, but benefits are inconsistent, and hedging isn’t a free lunch.
With bonds, the evidence points the other way. Global bonds behave more like UK bonds when their currency is hedged; that preserves the “safety” role of fixed income. Both academic work and practitioner research suggest a near-full hedge is risk-minimising for high-quality global bond exposures.
When does hedging pay off?
Hedging returns are tightly linked to interest-rate differentials embedded in forward FX prices. In environments where the foreign currency’s short-term rates are lower than the UK’s, hedging that currency can add a small premium, and vice versa. The FT’s recent piece makes exactly this point. Whether it “pays” to hedge depends on those differentials rather than a directional view on the level of the currency.
What about the performance of sterling and my overseas buying power
Currency doesn’t just live in your portfolio statement. When sterling weakens, the price of imports and overseas spending tends to rise in GBP terms; when it strengthens, those costs often fall. UK statistical and central-bank research has documented how exchange-rate moves feed through, first into import prices, then into producer and consumer prices, with the effect more visible in high-import-intensity categories (think tradable goods).
If you want to retire abroad, for example, this is something to consider.
Over very long horizons, currencies don’t drift arbitrarily forever relative to each other. This is not a signal to trade FX, but it does support a patient, rules-based approach rather than making heroic bets on today’s level. Such an approach can provide a sense of stability and confidence in your investment strategy.
What would a simple currency policy look like?
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Own global equities, mostly unhedged. Let equity currency moves be part of your diversification; don’t rely on them, but don’t fear them either.
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Own global bonds, hedged to GBP. Keep fixed income “fixed”—use GBP-hedged global bond funds so bonds dampen portfolio swings.
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Match known foreign-currency spending. If you expect substantial USD/EUR spending (fees, property, sabbatical), build/earmark assets in that currency or GBP-hedge the exposure in advance. This proactive approach ensures you are prepared and in control of your financial future, regardless of foreign exchange rate fluctuations.
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Don’t chase FX views. Hedging isn’t a panacea; costs and carry matter, and long-run PPP suggests a dose of humility. Keep decisions systematic. This systematic approach will help you make informed decisions and avoid impulsive actions based on short-term market movements.
If you’d like personalised guidance, we can review your portfolio’s currency exposures, check your bond hedging, and build a clear plan for any international spending you expect over the next few years.
Book a quick chat with us and we’ll map this to your goals and cashflow so you can invest and spend confidently. Schedule a free, no-obligation chat here. A guide on selecting a financial advisor is also available here.
This article is for general information only and does not constitute personal advice. If you’d like advice tailored to your specific circumstances, please contact us.
