In the January edition of our newsletter, I wrote about the radical uncertainty a Trump presidency could unleash on the world’s investment markets. This has come to pass in the four months since with a period of exceptional market volatility. World markets now are back where they started in currency neutral terms, but this conceals some remarkable trends. Most notably for Irish investors, the Eurostoxx index has outperformed the US S&P index by a record 20% so far in 2025. There are several reasons for this, but the most intriguing one is the 9% rise in the euro vs. the dollar since Trump’s inauguration. In this edition I explore the importance of currencies for our investors and how we manage them in our portfolios.
Donald Trump has publicly stated his desire for a weaker dollar. If he follows through on this, it will mark the end of a long era of a strong dollar policy from the US government. Trump’s theory is based on his belief that a weaker dollar will boost American exports by making them cheaper for foreign consumers. This feeds into his America First agenda but it ignores the major advantages that dollar strength has brought to the US economy. It also ignores the fact that governments find it much harder to control currencies than they like to think. When the euro was launched in 1999, €1 would buy you $1.15, in October 2000 it hit a record low of $0.82, in July 2008 it reached a record high of €1.60 and today it is more or less back where it started – it will buy you $1.12.
Despite this wide trading range, the US dollar has long been considered the safest currency in the world. This has given it the unofficial role as the world’s reserve currency where sovereign, institutional and retail investors like to invest their portfolios in shares and bonds. It is also the default currency for global trade in oil and other goods and commodities. Every time your pension fund buys US shares it buys dollars. As I noted in January, the US market represents 70% of the global stock market. That is a lot of foreign currency floating into dollars from retail and institutional investors. Every time the Chinese and Japanese governments buy US Treasuries, which is the largest and most liquid government bond market in the world, they are selling their own currency and buying dollars.
This wall of global money flowing into dollars has allowed the US government – and therefore US consumers – to borrow money more easily and at lower interest rates. It also gives the USA unrivalled power to influence the world by financial means, if required. This provides a free boost to the US economy and diplomacy. This phenomenon together with the unique success of US tech companies in the 21st century gave rise to the concept of ‘US Exceptionalism’. This is all based on trust in stability of the US government. The flipside of this financial power is the temptation it creates to borrow too much and to bully trading partners. Some investors are beginning to worry about the risk of Trump abusing this power and the effect of his unpredictable policy making on the dollar and US assets.
This creates a self-fulfilling cycle. Worried investors sell US assets and therefore US dollars. This tends to cause the dollar to fall. When the dollar falls against other currencies, the value of US shares and bonds falls for foreign investors, even if the price in dollars stays the same. Then investors get more worried. So far, the effect has been modest but the risk is there.
Some investors are also growing wary of the fundamental economic case for US exceptionalism and the dominance of global equity markets by US companies. The USA represents 70% of the global stock market, but only 25% of the global economy. This begs the question as to whether that dominance is sustainable. New research quoted in the FT, shows that of the 3.9M private sector US jobs created since the beginning of 2023, over half of them were in the healthcare and social assistance sector. This sector notoriously absorbs almost twice as much US GDP compared to European countries while achieving much worse health outcomes. It seems that the USA has two parallel economies. On one hand there’s the ruthlessly efficient tech companies generating enormous profits but not many jobs. On the other is a bloated healthcare sector that generates a lot of jobs but not much good health. If Trump succeeds in attracting manufacturers back to the US, who will run those factories in an economy with low unemployment and tighter immigration policies? If he succeeds in reducing taxes without reducing an already stretched social and health welfare budget, who will lend the USA the money to fund their ever-widening budget deficit?
In our view, it makes sense to assume that American dominance of global equity markets is unlikely to get bigger and is at considerable risk of gradually getting smaller. So how do you diversify your portfolios and manage the risk of the currency movements in your portfolio?
When it comes to government and corporate bonds, we take the view that our investors look to this asset class for low risk and modest steady returns. So, we only invest in bond funds that hold euro-based bonds or hedge the currency risk. This provides exposure to a wide range of government bonds from sovereign issuers like Germany, Ireland, France and all the Eurozone members. In the corporate bond market, it allows access to hundreds of large European companies but also several US companies that borrow in euros to fund their European operations. So, there is virtually no currency risk for our clients in this asset class which typically accounts for 30%-45% of a balanced portfolio and 20%-30% of a growth portfolio.
In the commercial property sector, we primarily invest in funds that hold property in the Eurozone such as Ireland, France and the Netherlands so there is no currency risk. When we allocate to UK and Global property, we use funds that hedge their currency risk. There is a small cost to this, but it removes most of the currency risk and allows our clients to maintain their returns in line with the typical moderate volatility range that property provides.
In our allocations to shares across the global and emerging stock markets, we can employ a range of strategies. Firstly, we take the view that equities are the high risk/high return asset class. Currency is just another part of the overall risk that comes with the territory of global equity investing. Secondly, we believe that the risk of investing only in local shares far outweighs the risk of diversifying across regions, so our default strategy is to invest globally. Most large companies around the globe generate their profits in a variety of currencies, so it is impossible to avoid currency risk entirely.
Where appropriate, we like to blend index-tracking global equity funds that will hold a 70% allocation to the US market with actively managed global equity funds that can choose to adopt a lower US and dollar exposure, when required. Finally, for clients with a strong view on currency and US exposure, it is possible to invest in global equity funds with a currency hedge or to invest in a tailored blend of regional equity funds.
The multi-asset funds we use all employ currency hedging strategies.
The base case of the Clinch investment committee is that the US is still the strongest economy in the world and the dollar is the strongest currency. So, we will continue to invest a portion of our equity allocation to the US market, for our diversified portfolios. To be prudent, we will also use all the strategies at our disposal to manage the currency risk, in the event that US shares gradually move to a lower proportion of the world market and the dollar loses a little of its long-held lustre.
