Understanding How Currency Affects Your Investments: A Look at the S&P 500
For most of us, the only time currency or foreign exchange considerations impact our lives is when we go abroad. We might notice that buying foreign money comes with a cost: the difference between the buying and selling price, known as the ‘spread’. This small gap helps currency dealers make a living and is part of the service they provide.
You may believe that unless you are planning a holiday abroad FX has limited impact on your life. In this article, I want to explain why foreign exchange is always important, whether you are travelling or not. I am going to demonstrate this by focusing on one element: the return of the US equity market for sterling (UK Pound) based investors.
2025 has been characterised by what one might call a bold strategy by the current US President. Its implications are far reaching, and the full impact is yet to be experienced. The impact on the FX markets is notable. Sterling has strengthened considerably versus the US dollar, or rather the dollar has weakened. This means that one can buy more dollars per one pound sterling. That should be positive for us UK based investors. However, the impact of this change depends on your circumstances. If one is a tourist visiting the US from the UK then yes, your pound sterling goes further. But, as investors, any holding that delivers returns in US dollars are worth less as the currency has depreciated versus sterling. This is most easily highlighted by the returns of our US assets on a year-to-date basis. In US dollar terms, the equity market, taken to be the S&P500, is up (to 24th July 2025).
I do not place much value in short-term performance, but I cannot ignore what could be the start of a new trend. I have created a chart below showing the difference in return for the US dollar and the sterling investor in what is basically the same investment the S&P500 Index.
The return differential is stark; the US dollar investor is up nearly 9% (a very respectable return for such a short time), whereas the sterling investor is barely breaking even. This is laid squarely at the foot of US dollar depreciation.
Is there anything that can be done? Yes, one could ’hedge’ the currency, which means paying for protection against movements in the value of the currency. However, whilst this can be done, it would be expensive, complicated, and hard to accomplish for the retail investor.. At this point I should highlight that our policy is, as a rule, not to hedge currency, particularly for equity investments. A couple of reasons for the policy dominate.The most significant is that historically, the British Pound has gradually weakened against the US Dollar over time. This is because the US economy is larger, stronger, and tends to grow faster than the UK’s. That means that holding US investments without hedging the currency has often worked in our clients’ favour.
Year to date, this prevailing wisdom has let us down: why? As mentioned earlier, President Trump’s trade policies and their ‘on again, off again’ nature, or rather his fickle approach to friends and foes with respect to likely tariff levels have been the primary reason. ‘Liberation Day’ (2nd April when the President announced his tariffs) took investors by surprise with equity and US Government Bond markets both falling. Confidence in what is the reserve currency also fell. In times of stress, the US dollar should strengthen, but as these were self-inflicted wounds the currency suffered and others, including sterling, benefited. The President’s comments regarding the Chair of the Federal Reserve (the US central bank) and on his policy also led to currency nervousness.
Should we be tempted to hedge now? Our view is that the worst of the currency moves are behind us. So called ‘trade deals’ are being announced between the US and its trading partners. The validity and impact of these deals on markets is another discussion.However, we now know the limits the market, particularly the US government debt market, has placed upon him. Therefore, we believe that long term US dollar dominance will reassert and appreciation versus sterling will reestablish. The possibility for double-whammy (both the US equity market and currency appreciation) cannot be ruled out, although our view on US equities remains muted due to elevated valuations.
James Calder, Chief Investment Officer
James joined City Asset Management in 2009 and is our Chief Investment Officer, where he is responsible for managing the investment process and chairing the asset allocation, portfolio construction and fund selection committees. He is also a member of the Executive Committee. He has over 25 years’ experience, including roles at Gartmore, BestInvest and Baring Asset Management, and specialises in multi-asset real return investing. Throughout his career he has been a key mentor for younger analysts and enjoys watching them progress on to their own successful careers.
