Dollar downer

Global equity returns for GBP investors have been lagging their international counterparts. A rare period of USD weakness, rather than GBP strength, is the culprit. How long will it last, and how should GBP investors structure their portfolios?

29 July 2025

Spare a thought for GBP-based investors. To watch the MSCI AC World Index in local currency or US dollar terms this year is to watch a near-miracle of resilience given everything thrown at it, including trade wars, actual wars, extreme political and geopolitical uncertainty as well as fiscal distress. But for investors whose portfolios report in sterling terms the celebrations have been slightly more muted.

The reason for the disparity of course is dollar weakness, with the greenback falling just over -7%* against sterling this year to 18 July. Given that fully 70% of the MSCI AC World index is now represented by US stocks, this means that as global equity returns get translated into a stronger sterling for UK-based investors those returns have naturally been blunted, and by quite a bit (see chart for full comparison). For years, UK-based investors didn’t need to worry about this, confident that as Britain’s place in the world slipped and that as successive crises (both external and self-inflicted) battered the economy since 2007 cable (GBPUSD) would duly reflect the nation’s weakened position. Indeed, for those of a historical bent the trend goes back even longer. In the decades up to the Second World War a pound bought around USD 5* but then an era of reliable deterioration began. Fast forward to today and 2025 is shaping up to be a year which bucks the trend. The key questions for investors are whether ‘normal service’ will resume anytime soon, or will investors have to get used to seeing their GBP-denominated returns continue to take a hit net of whatever happens to their portfolios’ underlying investments?

Every global equity investor is equal, but some less than others this year:

Performance from 31 Dec 2024 to 18 Jul 2025

Rue Britannia! – USD weakness is the real driver of sterling’s ‘strength’

To answer this, it’s worth exploring what has actually been driving the break in the long-term pattern this year. For a significant move in any given currency pair it’s not necessarily the case that it takes two to tango, and this is especially true of cable recently. A brief review of the UK’s economic ‘scorecard’ reveals a dire fiscal situation, continued sluggish growth and low productivity and a central bank expected to cut rates in August (despite some awkward inflation). This body of evidence, plus sterling’s more general softness as measured by the Deutsche Bank GBP Trade-Weighted index points to a USD weakness story rather than an unlikely GBP strength one. On the USD front, there are two very persuasive culprits accounting for the currency’s recent weakness. The first is the unpredictability and chaos surrounding President Trump’s Liberation Day and its aftermath. Bank of America’s respected fund manager survey recently revealed that professional investors hold the smallest proportion of the greenback for two decades, along with the lowest exposure to US assets generally. The second driver behind dollar weakness is America’s enormous borrowing commitment to finance a budget deficit of fully -6.3%* of Gross Domestic Product (GDP), a level more typically associated with full-blown economic crises such as in 2008 and during Covid-19. The so-called Big, Beautiful Bill recently passed by Congress and signed into law by President Trump on 4 July will serve only to engorge the deficit and cause doubt among investors that the US is a reliable home for their money. The Bill sees USD 4.5 trillion of tax cuts but only USD 1.5 trillion* of spending cuts. Little wonder then that recent price action in the otherwise dull but informative long-dated US Treasury market has revealed a reluctance by lenders to buy up US debt. Yields on the 30-year US Treasury bond now stand at over 5% versus just under 4%* in the middle of last September, signalling a rising cost of borrowing.

Politics could keep undermining the dollar’s appeal for now

Hopes that short term relief might be coming were raised amid Israel’s recent strikes on Iran’s nuclear infrastructure, when the dollar appeared to rise on days when fear was at its highest, falling back when things seemed less worrisome. But even before the ceasefire that was brokered on 24 June, the dollar was weakening once again as the drivers described above re-asserted themselves and attention turned once again to tariffs and the deficit. And neither of these appear likely to go away soon. The dollar has historically been a proxy for confidence in the nation’s economy and governance but this year it is largely failing in its role as a haven from elevated risks (see chart). Any restoration of this function would probably require a level of calm and predictability from Washington that seems unlikely to materialise much before November 2028, when the next US presidential elections are due. On the other side of the currency pair it is of course possible that the UK situation deteriorates further and sterling underperforms the dollar amid yet another fiscal or other shock. The parliamentary Labour Party understandably appears in no mood to support fiscal austerity measures given its ideological and moral mission, leaving the beleaguered government with few options other than more growth-destructive tax rises on the middle class at the next autumn Budget. This might spur the Bank of England to cut rates further to protect growth but since this is largely priced in already, the case for imminent sterling weakness now is less clear.

Dollar has been weakening, not strengthening, amid elevated uncertainty:

Performance from 30 Jun 2015 to 30 Jun 2025

Never bet against America

How then should GBP-denominated investors approach all this at the portfolio level? In the first instance a portfolio’s structural currency decision should be seen as intertwined with an investor’s risk capacity and suitability profile rather than as a pure investment ‘call’. Investors who find they cannot tolerate the additional swings currency moves bring to their investments should consider a hedging programme to eliminate some or even all of these risks, and this should be discussed carefully with their advisors. Hedging of course is not free of on-going costs, and for those who perhaps can tolerate the currency moves but don’t like them all the same (think turbulence on a plane), relief from a weaker dollar in the longer term is not inconceivable. America remains a fundamentally compelling place to invest that can’t easily be ignored. Its deep capital markets, energy self-sufficiency, technological innovation, management quality and work culture mean that it can’t be underweighted forever even when the alternatives are seriously considered, and that should ultimately support its currency once more. If this sounds unpersuasive, swapping out the word ‘America’ for ‘Britain’ in that last sentence is even less so.

Julian Howard is Chief Multi-Asset Investment Strategist at GAM Investments. This article represents the views of GAM’s Multi-Asset team.