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What the Dollar’s 2025 Decline Taught Us About Currency Risk
Hoxton Blog • What the Dollar’s 2025 Decline Taught Us About Currency Risk
The dollar’s decline in 2025 has generated plenty of headlines, often framed as a warning sign or a trigger for concern.
For long-term investors, however, it is better understood as another reminder of how markets and currencies naturally move through cycles, rather than as a signal to take rushed decisions.
Currencies rise and fall for many reasons, including economic growth, interest rates, politics, and investor confidence.
These shifts can feel unsettling in the moment, especially when they dominate the news, but they are a normal part of global investing. What matters far more than the move itself is how well your portfolio is prepared to absorb it.
The real question for investors is not whether the dollar has weakened, but how currency movements feed through to returns, risk, and diversification over time.
A well-constructed portfolio is designed to cope with these changes, using them as part of a broader plan rather than treating each swing as a problem to be solved.
Seen through that lens, the dollar’s move in 2025 is less about predicting what comes next and more about reinforcing an old lesson. Understanding currency exposure and planning for it calmly is far more valuable than reacting to headlines after the fact.
Why the Dollar Weakened in 2025
After many years of strength, the U.S. dollar experienced one of its weakest years in decades.
Broad trade-weighted measures suggest it fell by around 8% to 11% in 2025, with declines of roughly 10% to 15% against major currencies such as the euro and the pound.
Several factors were at play. Expectations for U.S. economic growth slowed, concerns about government borrowing increased, and policy uncertainty weighed on confidence.
At the same time, sentiment towards Europe and the UK improved, helping the euro and sterling regain ground against the dollar.
Put simply, the long-running strong dollar cycle appears to have lost momentum.
What Analysts Expect Against Sterling and the Euro
Most major investment houses do not expect the dollar to collapse. The more common view is that it may drift modestly lower rather than fall sharply.
Some forecasts suggest the euro could trade around 1.20 to 1.22 dollars and sterling around 1.36 dollars by late 2026. That would point to gradual further weakness in the dollar rather than a dramatic move.
Others expect a more uneven path, with the dollar holding up better against some currencies while softening against the euro and pound.
The shared expectation is that incremental shifts and periods of volatility are more likely than a straight-line decline.
FTSE 100 Returns: Sterling Versus Dollars
You can already see the impact of currency movements in FTSE 100 returns.
For UK investors, the picture is straightforward. The FTSE 100 has started 2026 near record levels and is up around 2% to 3% so far this year. Compared with the same point a year ago, it is up close to 20%. That reflects a strong year for large UK companies.
For U.S. investors, returns have sometimes looked better. As the pound strengthened against the dollar, UK shares were worth more when translated back into dollars. In other words, U.S. investors benefited not only from rising share prices but also from the currency move.
The key point is simple. Two investors can hold the same market and still get different results. The difference often comes down to the currency they spend.
Why Currency Matters in Investing
When you invest overseas, you are exposed to two things. One is the investment itself. The other is the currency it is priced in.
If your home currency weakens, overseas investments can look more valuable when converted back. If your home currency strengthens, it can reduce the return, even if the underlying investment performs well.
For U.S. investors, a weaker dollar can enhance returns from overseas markets. For UK investors, a weaker pound can boost returns from U.S. and European assets, while a stronger pound can have the opposite effect.
Managing Currency Risk in Simple Terms
You do not need to predict currency movements to manage them sensibly.
One of the most effective tools is diversification. By spreading investments across regions and assets, you avoid being overly dependent on any single currency.
Some investors also hold assets such as gold or silver. These are priced globally and often behave differently from currencies and stock markets. A modest allocation can help add balance rather than act as a bet.
For investors who spend and plan in pounds, currency movements can sometimes add unnecessary ups and downs to returns.
One way to manage this is to use currency-hedged funds, which reduce the impact of exchange rate changes.
In simple terms, this means that returns are driven more by how the investments themselves perform, and less by short-term swings between sterling and currencies such as the dollar or the euro.
At Hoxton, we have taken this approach in sterling-based portfolios for several years, where it makes sense, particularly in core equity and bond holdings.
The aim is not to remove currency exposure entirely, but to reduce noise and improve consistency for clients whose long-term goals and spending are in pounds.
This has helped smooth the journey over time, while still leaving room to take active currency positions where they genuinely add value.
When It May Make Sense Not to Reduce Currency Effects
Whether it makes sense to reduce currency exposure depends largely on time horizon.
For short-term goals, currency swings can have a bigger impact, so limiting their effect can be helpful.
For long-term goals, currency movements often balance out over time. Leaving some exposure in place can add diversification, even if it means accepting more short-term ups and downs.
There is no single right answer. The key is that the approach should support your overall financial plan rather than react to headlines.
The Planning Message
The dollar’s weakness in 2025 is an important development, but it should be considered within a broader plan rather than driving big, reactive decisions.
The key points for investors are straightforward:
- Currency movements can materially change how returns feel
- Most forecasts point to gradual shifts rather than dramatic moves
- Sensible diversification can help manage currency risk without constant changes
As with interest rates, elections, and market headlines, currency is simply another factor to manage calmly. The aim is not to predict every move, but to stay invested with a clear, long-term strategy.
If you would like to discuss how currency exposure fits into your portfolio or financial plan, please contact your Hoxton Wealth adviser.
You can also reach our client services team at client.services@hoxtonwealth.com or via WhatsApp on +44 7384 100200.
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