How Currency Movements Affect International Wealth — and What to Do About It

Of all the risks in an internationally mobile investor's portfolio, currency risk is the most personal and the most immediate. Market risk — the fall in value of equities or property — is shared with millions of other investors around the world and is widely understood and accepted. Currency risk is specific to the individual's situation: which currencies you earn in, which currencies you spend in, and whether those match.

When they do not match, currency movements directly affect your living standards — not abstractly, but in terms of what your money actually buys next month.

The portfolio currency position

Every internationally mobile investor has, implicitly or explicitly, a currency position in their portfolio. This position reflects the currency (or currencies) in which their assets are denominated, and how those compare to the currency in which they spend.

A British national living in the UAE, receiving income in AED (pegged to the USD), with savings and investments predominantly in GBP: their living costs are effectively USD-pegged, while most of their savings are GBP. A 10% strengthening of the USD against GBP — which is not an unusual currency move — means their GBP savings are worth 10% less in terms of their actual spending power.

This is not a theoretical example. The AED/GBP rate has moved significantly in multiple periods over the past decade. A British expat in Dubai who held all savings in sterling while spending in AED experienced a 15–20% effective reduction in the purchasing power of their UK savings when GBP depreciated sharply after the 2016 Brexit referendum.

Historical currency volatility: it is larger than most investors expect

Currency markets are among the most liquid and most volatile financial markets in the world. Major currency pairs can and do move 15–25% within a year or two. Less liquid currency pairs move even more.

Several historical examples illustrate the magnitude:

GBP/USD: sterling has swung from approximately 1.70 in 2014 to around 1.20 in 2022, and back toward 1.30–1.40 in more recent years. The range — roughly 40% between peak and trough in a decade — is extreme for a major developed market currency pair.

GBP/EUR: the Brexit-related sterling decline of 2016 saw GBP/EUR fall approximately 15–20% in the months following the referendum. For a British retiree in Spain, that was effectively a 15% pay cut on a pension paid in GBP, with no change in their UK income or investments.

JPY/USD: the yen weakened approximately 50% against the USD between 2021 and 2024, one of the most dramatic moves in a G7 currency in modern times. Investors holding yen assets during this period experienced devastating real return losses when converted back to dollars.

EM currencies: Turkish lira, Argentine peso, Egyptian pound, and many other EM currencies have experienced devaluations of 30–50%+ within single years. International investors in these markets who held assets in local currency were significantly affected.

The domestic investor illusion

A common misconception among UK investors is that holding UK-listed equities provides protection against currency risk — after all, these are sterling-denominated investments. This is partially true for smaller domestically focused companies but largely false for the FTSE 100.

Companies listed on the FTSE 100 derive approximately 70–80% of their revenues from outside the United Kingdom. Shell, HSBC, BP, Unilever, AstraZeneca, Rio Tinto — the largest companies in the UK index — are genuinely global businesses. Their earnings are in USD, EUR, AUD, and dozens of other currencies. The sterling value of these earnings rises when GBP weakens and falls when GBP strengthens.

When sterling depreciated sharply in 2016, the FTSE 100 actually rose in sterling terms — because the underlying earnings of its global companies were now worth more in pounds. A UK investor who cheered this "equity market rally" was in reality holding the same underlying value; it was just being expressed in cheaper pounds.

The implication: the currency composition of a portfolio is a genuine separate consideration from the asset class composition. An "all-UK equity" portfolio is not a "sterling portfolio" — it is a highly diversified global currency portfolio expressed in sterling.

Currency risk in retirement: the most underestimated scenario

For British nationals who retire abroad — to Spain, France, Portugal, Cyprus, Thailand, or elsewhere — currency risk becomes one of the central financial risks of their retirement. Yet it receives less attention in most retirement planning conversations than investment return assumptions or drawdown rates.

Consider: a British retiree in Spain receives a UK defined benefit pension of £2,000 per month. At GBP/EUR of 1.20, this is €2,400 per month. Their rent, supermarket bills, utilities, and most daily expenses are in EUR. If GBP/EUR falls to 1.05 — a move of approximately 12.5% — their effective monthly income in terms of spending power falls to €2,100. Without any change in their UK income or investments, their purchasing power in Spain has declined by €300 per month — €3,600 per year.

Over a 25-year retirement, the cumulative and compounded effect of unfavourable currency movements can be very significant. And unlike investment risk — where a recovery in the equity market restores portfolio value — currency moves can persist for very long periods.

Managing currency risk: the practical toolkit

Natural hedging

The most straightforward approach to currency risk is natural hedging: matching the currency of your income and assets to the currency of your expenditure. If you live in France and spend in euros, holding a significant portion of your portfolio in EUR-denominated assets means your spending power is stable regardless of GBP/EUR movements.

For British expats in the eurozone, this typically means:

• Maintaining EUR-denominated savings and investments (through international platforms that allow multi-currency holdings)
• Taking pension income in EUR where possible (some pension annuities offer currency options; pension drawdown can be invested in EUR-denominated funds)
• Holding property in the local currency (which it inherently is)

Natural hedging is simple and cheap — no forward contracts, no hedging costs, no monitoring required.

Currency diversification in the portfolio

Rather than concentrating assets in any single currency, holding a broadly diversified investment portfolio inherently provides exposure to multiple currencies. Global equity ETFs hold companies in USD, EUR, GBP, JPY, AUD, and many others. This diversification does not eliminate currency risk but it avoids concentration in any single currency pair.

FX forward contracts for planned large transactions

For a specific, foreseeable large transaction in a foreign currency — a property purchase, a lump sum transfer, a pension commutation — an FX forward contract can lock in today's exchange rate for a future transaction date. This provides certainty about the sterling cost of the foreign currency payment.

FX forward contracts are provided by currency brokers (Moneycorp, TorFX, Currency Solutions, Wise Business) and by banks. They are appropriate for known future payments, not for ongoing portfolio management.

Offshore bond in multi-currency

International offshore bond wrappers (RL360, Quilter International, Zurich International, and others) typically allow the bond to be denominated in multiple currencies and to hold funds in GBP, USD, and EUR within the same wrapper. The holder can switch the reporting currency of the bond and can hold assets in the currency most aligned with their spending.

For internationally mobile investors who move between different currency zones over their career, a multi-currency offshore bond provides the flexibility to align the portfolio with the relevant spending currency at each stage.

The action plan

For an internationally mobile investor concerned about currency risk, the practical steps are:

1. Map your currency exposure: what currency are your assets in? What currency are your expenses in? Where is the mismatch?

2. Identify the most significant mismatch: the most important currency pairs to focus on are those where a large proportion of your assets are in one currency and a large proportion of your expenses are in another.

3. Consider natural hedging through the investment portfolio: if you live in Europe, ensure a meaningful portion of your portfolio is EUR-denominated, not exclusively GBP.

4. Review your pension income currency: if drawing from a UK pension while living abroad, consider whether EUR or USD-hedged pension drawdown options are available.

5. Use FX forwards for large planned transactions: for any known large cross-currency payment more than 3 months in the future, consider locking in the rate.

6. Do not attempt to predict currency movements: currency forecasting is exceptionally difficult even for professionals. The goal is risk management, not speculation.

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Currency risk is real and can have a significant impact on living standards and purchasing power. FX rates are volatile and cannot be forecast reliably. This article does not constitute personal financial advice. Always seek independent professional advice appropriate to your circumstances.

How Global Investments can help

Currency management is an integrated part of our international financial planning service. We help clients map their currency exposure, design portfolios with appropriate currency alignment, and plan large cross-currency transactions. Contact us to review your currency position.