Hedged vs Unhedged International Equity Exposures

Should you hedge foreign currency exposures?

July 2025. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • USD-hedged products have outperformed significantly recently
  • However, history shows plenty of periods of USD weakness
  • EM outperformance seems linked to USD weakness

INTRODUCTION

For U.S.-based investors, international equities offer compelling opportunities. The S&P 500 currently trades at a trailing price-to-earnings (P/E) ratio of 32.9x, significantly higher than the MSCI Europe at 22.6x and MSCI Japan at 16.3x. While valuation is an important metric, it is not the only one -earnings growth in the U.S. has outpaced that of other regions, which may help justify these elevated valuations.

Currency exposure is another key factor when investing internationally. The U.S. dollar has recently weakened against major currencies such as the euro, partly due to tariffs imposed by the U.S. government. But what if the dollar rebounds? In such a scenario, U.S.-based investors could face currency-related losses on their foreign equity holdings.

In this research article, we examine the implications of hedged versus unhedged international equity exposure from the perspective of a U.S. investor.

U.S. DOLLAR INDEX 

The U.S. Dollar Index (DXY) is perhaps the most widely recognized measure of the U.S. dollar’s value. It tracks the dollar’s performance against a trade-weighted basket of six major currencies: the euro (58%), Japanese yen (14%), British pound (12%), Canadian dollar (9%), Swedish krona (4%), and Swiss franc (3%). Over the past 50 years, the DXY has fluctuated between a low of 71 and a high of 164 – moves that have had significant implications for the U.S. economy, particularly in terms of trade competitiveness.

The index peaked in the early 1980s, following the oil crisis of the 1970s, when the Federal Reserve raised interest rates above 15% to combat inflation. Its lowest point came during the Global Financial Crisis of 2008, as the collapse of the subprime mortgage market severely undermined confidence in the U.S. financial system and economy.