With higher-than-usual FX volatility, how do investors manage currency risk in portfolios?

[SINGAPORE] Currencies have seen sharper-than-usual divergent trends over the past 12 months, as investors scramble to protect their portfolios against wild market swings. 

The greenback weakened dramatically in late 2025, with the US dollar index sliding to a multi-year low. This came on the back of aggressive Federal Reserve interest rate cuts and a softening labour market, dragging the US dollar down to a low of US$1.26 against the Singapore dollar earlier in 2026.

But it reversed course and surged to the highest level in over a year by June amid robust equity and tech markets, as well as a resilient economic outlook.

The yen also charted a volatile course. The Japanese currency’s brief appreciation in mid-2025 – fuelled by expectations of Fed rate cuts and a gradual tightening by the Bank of Japan – proved short-lived. The yen erased all previous gains by June, hitting a 40-year low against the US dollar.

Malaysia’s ringgit, on the other hand, staged a historic recovery after decades of broader depreciation. It outperformed all Asian currencies last year, after breaking through a 13-month high in November 2025 and appreciating 7 per cent against the US dollar.

A gauge of expected volatility in major currencies over the coming month has edged higher in recent weeks, Bloomberg data shows.

Amid fragmented movements and heightened volatility, actively managing and diversifying currency risk across cross-border portfolios is now crucial.

The Business Times asks experts which currencies stay resilient and which are volatile – and how to best hedge currency portfolios in the second half of this year.

The risk of currency concentration

A main risk investors face is often currency concentration, particularly amid volatility in currency markets.

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“A portfolio may look diversified across different stocks, bonds or funds, but if most of those assets are exposed to the same currency, then there is a common currency risk,” said Christopher Wong, FX strategist at OCBC.

This means that any significant depreciation in currency can reduce – or even erase – otherwise attractive investment returns when converted back to an investor’s home currency.

Such currency concentration, Wong said, can therefore leave investors more exposed to a country’s economic cycle, interest-rate policy and domestic risks.

Key currencies to watch for

Experts told BT that global currencies are set for “increasingly differentiated” pathways this year.

While the Singapore dollar and the Swiss franc are seen as more resilient, emerging-market currencies such as the Indonesian rupiah and Japanese yen are set to be more volatile.

This comes as currencies are driven by differences in monetary policy, fiscal credibility, external balances and domestic growth prospects.

The objective of investors should not be to identify one “winning” currency, however, but to diversify their portfolio across currencies with different economic drivers, said Saktiandi Supaat, head of FX research at Maybank Securities.

For example, instead of focusing solely on the direction of the US dollar, investors should pay attention to policy credibility, interest rate differentials and domestic fundamentals, too.

“A balanced portfolio should combine relatively defensive currencies with selective exposure to cyclical currencies where valuations and fundamentals remain attractive,” he told BT.

That said, the strategy for long-term and short-term investors would also differ.

Saktiandi said that long-term investors do not need to hedge every short-term currency movement, while shorter-term investors or those with defined liabilities may require more active currency management.

“Regular portfolio rebalancing can also help prevent unintended currency concentrations from building up over time,” he added.

What currency hedging can look like

A common risk management tool is currency options, especially during periods of elevated uncertainty surrounding interest rates, geopolitics and trade policy.

“Their main advantage is flexibility,” said Saktiandi.

“Unlike forward contracts, which lock in an exchange rate, options provide protection against adverse currency movements while allowing investors to participate if exchange rates move in their favour.”

That said, options are not without costs, as their premiums are more expensive amid greater market volatility, reducing the underlying investment’s overall return if the hedge is ultimately not required.

The way and extent such tools are used can vary for different investors, too – as they depend largely on the end-goal of each portfolio.

A bond investor, for example, typically prioritises income stability and capital preservation.

Saktiandi said this means currency movements can “easily overwhelm” the yield generated by the bond itself, as bond returns are usually more modest than equity returns. “A 5 per cent annual bond return, for example, can be offset by a similar-sized depreciation in the underlying currency.”

As a result, bond investors often hedge most – or all – of their foreign currency exposure, in order to preserve the predictability of returns, he added.

However, equity investors have a different objective. They usually invest over a longer time horizon and seek capital appreciation, which means they will hedge only part of their currency exposure, or even remain unhedged.

“This is particularly if they expect the underlying currency to appreciate over time, or if the cost of hedging is relatively high,” Saktiandi explained.

OCBC’s Wong said that at the end of the day, it is best to be “selective” when hedging currencies. “The aim,” he added, “is not to remove all currency risk, but to make sure no single currency has an outsized impact on the portfolio.”