The declining value of the dollar spells trouble for UK investors with stakes in US and international funds.

The weakening US dollar is eroding much of the profits that UK investors have traditionally enjoyed from the world’s largest and most vibrant economy.

This situation significantly affects global funds, many of which are heavily influenced by the US stock market and American corporations.

The crux of the issue lies in currency conversion; as the dollar weakens, returns earned in the US currency shrink when converted to pounds, potentially nullifying any gains.

While this isn’t a concern for those solely investing in UK stocks or assets, it poses a significant challenge for those with investments in the US, either directly or through global funds and typical workplace pension plans.

In recent weeks, the dollar’s value has dipped further, partly due to former President Donald Trump’s threats to impose new tariffs on European allies, including the UK, unless the US is granted control over Greenland.

Trump’s rowing back on Greenland has bolstered markets and the dollar – nicknamed the greenback – but concerns remain over the President’s tactics and also the future independence of US interest rate policy, with the Federal Reserve under political attack.

We look at what’s been going on with the dollar, and the options open to investors to mitigate the impact of its current weakness on returns. 

Why the US dollar matters to UK investors

On the face of it, Wall Street’s performance was still pretty healthy last year even though the US stock market lagged behind other markets including our own.

It just didn’t look that way after declines in the dollar were taken into account.

Movements in currency exchange rates are often underappreciated by private investors, but the lower dollar is having a significant impact on their returns right now, according to Bestinvest managing director Jason Hollands.

The S&P 500 rose by 16.4 per cent in capital terms (excluding dividends) in US dollars last year, but once currency losses were factored in UK investors received a much lower return of 8.4 per cent, he explains.

The MSCI World Index was up 19.5 per cent in US dollars, but UK investors got a return of 11.3 per cent in pounds.

This was significantly lower than the 21.5 per cent share price return from the FTSE 100, points out Holland – which UK investors received in full in their own currency.

Hollands said: ‘That’s clearly a potential headwind for returns on US and global funds, given US weightings are high in the latter, and alongside expensive US equity valuations.’

The dollar has been losing value for a number of reasons over the past year, and although currency movements are notoriously unpredictable the trend looks unlikely to reverse in the near term.

Just before the Greenland crisis, the dollar took a hit on news that a Trump supporting prosecutor was investigating criminal charges against Federal Reserve chair Jerome Powell, whose term in charge ends in May, over building renovation cost over-runs.

The move was seen as politically motivated, due to Trump’s repeated attacks on the Fed for not cutting interest rates by more. The President denied this, however.  

If Trump manages to capture control of the Fed and forces it to cut US interest rates more deeply than necessary, risking a new bout of inflation and depleting confidence from global investors in US debt, we could expect to see an exodus from the dollar.

And in a highly concentrated global market, with US shares accounting for more than 70 per cent of the MSCI World index that matters to British investors.

‘Unless you’re going on holiday abroad, it is easy to ignore exchange rates,’ says Jemma Slingo, pensions and investment apecialist at Fidelity International. ‘For investors, however, currency movements matter all year round.

‘Most UK investors are exposed to the US dollar. A weak dollar can eat into stock market gains – and magnify losses – as the value of these investments will be lower when converted into sterling.’

Why has the dollar declined, and will it weaken further?

Many causes of the decline are linked to the volatile Trump presidency – some apparently intentional on the part of his administration – while others pre-date it.

‘A tacit – but not formal – objective of the second Trump administration appears to be favouring a weaker dollar to improve the global competitiveness of US exports,’ says Hollands.

‘Expansionary fiscal policy including tax cuts, measures that will see the US deficit balloon and global trade uncertainties created through its aggressive approach to tariffs, as well weakening of traditional alliances, have all combined to see a softer dollar.

‘Clearly, the criminal investigation into Jerome Powell is only going to exacerbate a weaker dollar, as many will perceive this to be an escalation of interference in the Fed.’

A longer-term trend has seen some central banks offload US Treasuries and stockpile gold, which is one of the reasons the price of the precious metal has been so strong in recent years. 

(Gold is denominated in the US currency, so a weaker dollar also helps to boost the price.)

Authoritarian and some emerging market countries are thought to be doing this to bolster their financial position should they get on the wrong side of Washington and the West. 

The US can prevent sanctioned countries clearing dollars through its financial system.

Hollands says further dollar weakening in 2026 cannot be ruled out, as president Trump pushes the boundaries in undermining the independence of the Fed. After Powell’s tenure ends in May his replacement is sure to be more open to interest rate cuts.

He says: ‘A dovish chair won’t completely hand control of interest rate policy to the president, but the direction of travel will be for looser policy, and if the US ends up cutting interest rates at a faster pace than other major countries, this will likely weaken the dollar further. Despite last year’s decline, the dollar remains structurally overvalued.’

Hollands adds that tax cuts under Trump’s ‘One Big Beautiful Bill’ are about to kick in so policy on that front will be looser too.

He says: ‘The US is continuing to run very high budget deficits under President Trump, who has jettisoned the traditional prudence of the Republican party, with heavy issuance of new Treasuries to finance spending and tax giveaways.

‘If overseas investors demand higher compensation for holding US assets – or diversify away from them – the dollar will come under pressure.’ 

What does this mean for UK investors – can you avoid the fallout?

‘The dollar’s weakness over the last year has certainly weighed on UK investors holding US assets,’ says TrinityBridge investment officer Isabel Albarran.

‘Currency exposure is a source of return but also risk – there will be times when having exposure to non-sterling assets boosts returns, for example the period of pound weakness after the Brexit vote, and times when it hinders them, as we have seen recently.’

You can therefore just ride out currency moves if you are a long-term buy and hold investor. 

But let’s explore the options available to investors concerned about recent dollar weakness, and then run through some expert investing tips suitable for the different strategies.

Hedging: If you want to protect returns, you can use the ‘currency hedged’ version of a fund, although this is generally not recommended because it involves making tough judgement calls that professionals often get wrong.

Ben Yearsley, director of Fairview Investing, says buying a currency hedged fund is easy enough but you will be charged extra for the privilege.

He has personally only done it once with a Japanese fund he bought 12 years ago, because at the time it was clear the government was trying to devalue the yen – and he says it worked ‘brilliantly’.

However, he notes that he has never exited the hedged fund, and this is an option to avoid the risk of currency moves suddenly reversing.

‘You could in theory just leave it once you are in it. Those who try to time it tend to come unstuck.’

Albarran warns: ‘Given that asset class returns and currency moves can be closely intertwined, hedging currency exposures could yield some unintended consequences.

‘For example, Japanese equities have historically been negatively correlated with the value of the yen, so hedging the currency could increase volatility.’

Hollands also cautions that exchange rate movements are very hard to predict with certainty, and says currency hedged versions of funds are mainly devised for professional not private investors.

When it comes to the dollar, he says: ‘While the odds lean more towards further weakening, if the dollar ends up appreciating versus the pound – for example because the Bank of England cuts rates more than expected to stave off a recession – then a currency hedging strategy could backfire.’ 

Diversify asset allocation: You can rebalance your portfolio away from the US and invest more in the UK, or in countries likely to benefit from a weaker dollar, or simply review it to ensure it’s generally well balanced.

‘Home bias’ offers some natural advantages, in terms of local knowledge and being invested in your own currency.

Meanwhile, Jemma Slingo of Fidelity notes downward pressure on the dollar could provide a tailwind for emerging markets.

‘This is because it improves the spending power of the regions’ consumers, eases the burden of dollar-denominated debt, and reduces imported inflation,’ she explains.

Hollands says a weaker dollar can act as a kind of stimulus, especially for Asia and emerging markets which have borrowed in US dollars.

But he says a better strategy for most investors is to mitigate currency risk through overall portfolio diversification – in other words, don’t have too many eggs in one basket.

‘The multi-year love affairs with soaring US tech stocks has seen many investors become heavily exposed to US shares, but the higher returns they have consistently offered came to an end in 2025 and that may play out further,’ he adds.

‘We think emerging markets and Japanese equities look more compelling, and UK equities are also better value too.’

Albarran says: ‘On a tactical basis, investors may wish to allocate away from the US into other regions where valuations look more attractive.

‘The rationale for this has less to do with the currency movement and more to do with the more demanding valuations seen in the US, and the prospect of stronger returns in other regions.’

She goes on: ‘Today, the majority of the investible equity universe lies beyond the UK and is not listed in sterling.

‘While it’s important to understand currency risk, the investment opportunities of overseas holdings, and the stronger diversification achievable with an international portfolio, make an international approach attractive.’

Stick with the US: The US economy is the most innovative as well as the biggest in the world – and the dollar could bounce back at any time.

Many are worried about an AI bubble in the US, but if – or, it can be credibly argued, when – the promise of this groundbreaking technology is realised investors may get to share in the mammoth gains.

‘Whatever is happening with the dollar or at a political level, every investor needs to have significant exposure to the US,’ says Adrian Murphy, chief executive of Murphy Wealth.

‘If you have money in a global tracker fund of any sort, a large proportion of that will be US investments. That makes it almost impossible to avoid – and trying to do so would be a major risk.’

Murphy says the the S&P 500 alone has a market cap of around £46trillion compared with the FTSE 100’s £2trillion, and the US has accounted for around half, or as much as two-thirds at some points, of the global market in the past year.

‘Even individual companies like Nvidia, Apple, and Microsoft are valued higher than entire indices in many other countries.

‘While there have been concerns over a bubble forming in AI, the concentration of wealth, and a lagging jobs market, the reality is that many of the world’s most innovative companies and the tech stocks likely to drive the global market forward in the years ahead are based in the US.’

Murphy adds that the US has outperformed most others over the past decade or so, and has certainly been a more consistent source of returns.

‘A weak dollar may suppress returns in the here and now, but it is times like these staying focused on the long term tends to pay off. The US stock market and wider economy have shown an uncanny ability to bounce back and few would bet against it doing so again.’

Ben Yearsley, of Fairview Investing, says of investing in the US: ‘It’s almost better to be passive only unless you find a really interesting active fund. So many funds hug the index and you are paying 0.75 per cent for them.

‘Start with passive and add other interesting funds. Tech, healthcare and home insurance are all ways to play the US in a specialist fund.’

Gold: The price of gold has hit new records during the Greenland crisis.

‘If the dollar does weaken further, this should also support the continued case for holding gold,’ says Hollands.

‘There is a longstanding inverse relationship between the strength of the dollar and gold prices. A weaker dollar favours a stronger gold price and vice versa.

‘Projections for where the gold price goes next are very wide ranging, however.’

Investing opportunities in a weak dollar era

Hedging

Hollands tips:

iShares Core S&P 500 UCITS ETF Hedged GBP (Ongoing charge: 0.10 per cent)

This fund tracks the S&P 500 but converts currency exposure back into pounds, says Hollands. It costs 0.10 per cent annual costs, while its conventional sibling, the iShares Core S&P 500 UCITS ETF costs 0.07 per cent.

‘Over the last year, the additional costs have been more than worth it.’

Diversification

Hollands tips:

Ashoka WhiteOak Emerging Markets Equity (Ongoing charge: 1.05 per cent)

Federated Hermes Asia Ex-Japan (Ongoing charge: 0.83 per cent)

M&G Japan (Ongoing charge: 0.49 per cent)

Artemis UK Select (Ongoing charge: 0.54 per cent)

Temple Bar Investment Trust (Ongoing charge: 0.61 per cent)

Slingo tips:

Lazard Emerging Markets (Ongoing charge: 0.89 per cent)

Sticking with the US

Yearsley tips:

Polar Global Insurance (Ongoing charge: 0.83 per cent)

Barrow Hanley US Midcap Value (Ongoing charge: 0.85 per cent)

Gold

The precious metal is a store of wealth and hedge against inflation, a useful way to diversify and a safe haven asset during financial and political upsets.

But it generates no income and the price can be volatile, with many drivers that can act in concert or be in conflict, and hold weaker or more dominant sway at any one time.

We rounded up the main factors that influence the gold price here. Here’s how to invest in gold.

Exchange Traded Commodities (ETCs): This is similar to holding a index tracker fund, only for the gold price.

You need to check whether an ETC has exposure through derivatives rather than physically owning the precious metal, as these can be complicated.

Hollands tips Invesco Physical Gold ETC (Ongoing charge: 0.12 per cent) in this space.

Multi-asset or specialist funds: These are useful if you want to spread your risk in a well-diversified fund, or have an active manager make the important calls about current market trends.

Physical bars or coins: If you keep them at home you will need to ensure you have security and insurance cover. Many firms will hold them in a secure vault for you.

Mining stocks: These can be volatile so less experienced investors may prefer a fund whose manager specialises in this sector.