So far in 2025 the US dollar has experienced a significant decline in value, with a period of weakness marking its worst first half of the year since 1973. Against sterling it has fallen in value by around 10%. This weakening has been driven by several factors including President Trump’s aggressive tariff announcements, followed by a tax bill adding trillions to US debt. These policies have sparked investor concerns about US fiscal sustainability, prompting a sell-off of dollar-denominated assets including US Treasuries, and a shift toward alternatives like gold and European bonds.
This weakness is of course a double-edged sword. President Trump has for years publicly stated his wish for a weaker currency and the recent move will certainly benefit US exporters, but making imports more expensive could possibly push up levels of domestic inflation.
With over two thirds of the FTSE100’s earnings coming from overseas, a stronger pound can be negative for companies when bringing their earnings back to the UK. There is little doubt that in recent years UK investors have also moved money out of domestic assets and into overseas stock markets. The US has been one of the main areas into which this money has flowed. Up until now, this has been largely a one-way ticket, with US markets making new highs and a relatively strong US dollar further boosting returns for UK investors.
Recent dollar weakness now leaves UK investors facing something of a headwind, with currency losses more than offsetting the gains made by the S&P500 index year-to-date. Hedging out currency risk can be complicated and at times it is just a price that must be paid, but with markets expecting further dollar weakness, investors might now choose to once again increase exposure to their own domestic markets.
The value of securities and the income from them can fall as well as rise. Past performance should not be seen as an indicator of future returns. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.
