When Currencies Shift: What It Means for Your Investments

Currency risk is about more than investment returns

An international portfolio can perform well in its investment currency and still lose value when measured against the currency you use to live. For families with financial commitments in several countries, exchange-rate movements can affect retirement income, school fees, property costs and the real value of savings.

Currency risk is the possibility that exchange-rate changes reduce the value of an asset or income when converted into another currency. It can arise in three places: the currency investments are held in, the currency income is received in, and the currency future expenses or debts must be paid in.

Look at the whole family balance sheet

Consider a family earning in UAE dirhams, investing in dollar-denominated assets, paying school fees in sterling and owning property in euros. Their financial position can change even if the investments themselves do not move in value.

Start by listing major assets, debts, income sources and expected spending by currency. Include mortgages, pension income, tuition fees, planned property purchases and likely retirement costs. The important question is not simply which currencies your investments use, but whether your wealth will be available in the currencies in which you will need to spend it.

Some exposures may offset each other. Dollar assets alongside dollar liabilities, for example, can provide a natural hedge. Sterling pension income alongside euro-denominated living costs may create a mismatch that needs to be considered in the wider plan.

Understand the tax implications

Currency movements can also affect tax calculations. Depending on the asset, transaction and tax rules that apply to you, a gain measured in sterling may differ from the gain measured in the asset's local currency. It is possible for exchange-rate movements to affect a tax bill even when the investment's local-currency value has changed little or fallen.

Families who have lived or worked in more than one country should check how each relevant jurisdiction treats foreign-currency gains, investment disposals and overseas accounts. Tax treatment depends on individual circumstances and can change, so seek specialist advice before selling assets or restructuring holdings.

Ways to manage currency risk

Match money to known expenses. Holding a suitable reserve in the currency needed for upcoming school fees, mortgage payments or other commitments can reduce uncertainty without using complex financial products.

Review currency-hedged funds. These aim to reduce the effect of exchange-rate movements on an investment, but hedging has costs and does not remove every risk. Whether it is appropriate depends on the fund, time horizon and your circumstances.

Plan large transfers. Forward contracts may allow an exchange rate to be agreed for a future transaction, but they can limit the benefit of favourable rate movements and may involve obligations or costs. Take advice before using them.

Diversify thoughtfully. Holding assets in more than one currency can reduce reliance on a single currency, but it does not eliminate risk. The right mix depends on where you expect to live and spend, and on your wider financial goals.

A practical starting point

Before making changes, map your exposures, identify the biggest mismatches, consider the tax consequences and prioritise known future liabilities. Review the plan whenever you move country, change jobs, approach retirement or expect a significant cross-border transaction.

Currency risk is not a product to buy; it is part of planning your finances as a whole. Montfort International helps internationally connected clients consider investments, pensions, tax and future spending together, rather than treating each country or account in isolation. Advice should be tailored to your circumstances and the jurisdictions involved.