By Prof. Dr. Jan Viebig, Chief Investment Officer, ODDO BHF SE.
Lately, the US dollar has suffered significant losses. At the start of 2025, markets rewarded the perceived strength of the US economy by hitting new all-time highs. At the same time, the dollar soared to its highest level in 27 months. But the euphoria dissipated soon after Donald Trump took office. On the one hand, the new administration’s trade policy poses significant risks for the US economy. On the other hand, its fiscal policy threatens to accelerate the growth of the national debt. Additionally, the White House has called for the Fed to cut interest rates and seems to be vying for more control over monetary policy. There is also the threat of arbitrary additional taxes on US assets, investments and earnings held by foreign investors from specific countries, via an amendment to Section 899 of the Internal Revenue Code included in the so-called “One Big Beautiful Bill Act”. And lastly, discussion is ongoing on a proposal by Stephen Miran, the Chairman of the Council of Economic Advisers, to force central banks to swap their US Treasuries for non-tradable, zero-coupon 100-year bonds (Mar-a-Lago Accord).
No wonder that confidence in the dollar has fallen. The dollar has lost 10% against the euro this year, with the euro rising from USD 1.035 to USD 1.152 by 18 June 2025. This devaluation has negatively impacted European investors holding US dollar securities. In euro terms, their portfolios have underperformed already weak US stock markets as measured in dollars.
Investors often ask us whether they should seek to reduce exposure to a particular currency, and by extension, in this case, their exposure to dollar-denominated securities. We advise against making allocation decisions based on exchange rates, however. First, exchange rate forecasts are notoriously unreliable. Numerous studies have shown that that seeking systematic currency gains is a risky strategy.
Second, exchange rates influence revenues, costs, and profits, especially for international companies. For instance, US companies like Microsoft and Alphabet earn a substantial part of their revenues in euros, while European companies, such as SAP or Schneider Electric, generate significant earnings in dollars. If the dollar depreciates, the US company’s stock will perform more strongly in dollar terms than in euro terms. At the same time, revenues and profits generated in euros will appear higher in dollar terms, which will have the effect of supporting the share price. In short, in a world in which companies operate in many markets, how investors react to exchange rate fluctuations is anything but trivial.
We believe that long-term investors should not be overly concerned with exchange rates. For instance, over the past 20 years, the MSCI World Index had an average annual return of 8.9% in dollar terms but 9.3% in euro terms. For the last 10 years, the average return was 9.9% per year in dollars and 9.6% in euros (all figures to May 2025).
While market performance across currencies tends to be similar in the long term, over a shorter period, the gap can be significantly larger. Figure 1 shows the 12-month performance of the MSCI World (Net Total Return) in dollars and euros, from May to May each year. In 12 of these one-year periods, the performance in dollars versus euro differed by at least 5%, sometimes significantly more.
Figure 1: MSCI World 12-month performance in USD and EUR, 31 May 2006–31 May 2025
Source: Bloomberg, 31 May 2005 to 31 May 2025
Exchange rate considerations play a secondary role in our investment approach, for the reasons explained above: first, because currency movements are so hard to predict, and second because significant exchange rate fluctuations tend to have a negative impact on the earnings of international companies over the long term. We believe long-term investors are better off selecting companies based on the quality of their business model, profitability, and long-term earnings prospects. In this perspective, the listing currency becomes secondary.
