Weak dollar, strong franc: how to hedge currency risk when investing – and when this makes sense

US President Donald Trump's tariff policy has unsettled the financial markets, but American stock prices have nevertheless risen. The S&P 500, a benchmark for blue-chip stocks, has gained around 10 percent since the beginning of this year, and the Nasdaq Composite technology index has even gained more than 11 percent.

US bonds also yield significantly higher interest rates than, for example, Swiss government bonds or German federal bonds. Ten-year US Treasury bonds currently have a yield of 4.26 percent.

However, this means precious little to many Swiss and German investors. After all, the dollar has depreciated massively against the Swiss franc and the euro this year – which has had a very negative impact on US investments. Since the beginning of the year, the US currency has lost 13.2 percent against the Swiss franc and 12.3 percent against the euro. "This year has been brutal for investors; they have earned nothing on their investments in the US," says René Stiefelmeyer of Hinder Asset Management.

Strictly speaking, Swiss and German investors have actually been slightly in the red since the beginning of the year with their investments in American securities if they have not hedged the currency risk.

There are several indications that the dollar will remain weak. According to Thomas Stucki, head of investments at St. Gallen Cantonal Bank, the main reason for this development is the loss of confidence in the United States since President Trump took office. Investors are also concerned about the US government's attempts to increasingly influence the Federal Reserve's monetary policy. In addition, the high level of national debt also points to a continued weakening of the dollar.

Stucki also expects the franc to retain its role as a safe haven – if only due to the ongoing uncertainty in the financial markets. "It's rather uncertain whether the franc's strength will continue in the coming years," says Stiefelmeyer. If Switzerland, for example, moves closer to the EU, he doubts whether the franc will remain so strong. "The franc has been a rock for a long time, but its special position is increasingly coming under pressure."

So, should you hedge the dollar when investing or not? "The shorter your investment horizon, the sooner you should do so," says investment expert and author Patrick Eugster. Many investors also compromise and hedge half of their investment portfolio against currency risks.

For private investors who don't operate in the derivatives market, hedging against currency risks is ultimately possible primarily with exchange-traded funds (ETFs) or other investment funds that offer built-in currency hedging. Such products generally carry a designation such as "CHF-hedged" or something similar. At the same time, such products often have low management fees of, say, 0.2 or 0.3 percent. Investors should be aware that the high costs of currency hedging are not included in these fees, says Eugster—so they still pay them.

Currency hedging is very expensive when there are large differences in interest rates between two currency areas. This is currently the case between the US and Switzerland. While the Swiss National Bank (SNB) has lowered its key interest rate to zero percent, it is between 4.25 and 4.5 percent in the US.

According to Stiefelmeyer, the costs for currency hedging are calculated based on the respective forward rates. Forwards are forward contracts used, among other things, to hedge risks. These can fluctuate significantly over time depending on the interest rate differential between the home and foreign currencies – with corresponding effects on the costs of currency hedging, he explains.

Currently, the cost of currency hedging for Swiss franc investors against the dollar is 3 percent over a one-month horizon and 2.6 percent over a one-year horizon, i.e., with a 12-month forward. The cost of hedging the dollar is so high that one has to ask whether it's worthwhile in the long term, says Stucki.

According to Stiefelmeyer, hedging currency risk is definitely advisable for bonds and other nominal investments. "Currency fluctuations are simply too high compared to the interest rate, and the currency risk is not compensated," he says.

Despite the high costs of hedging currency risk, Stucki says that US bonds are advantageous because there is a much wider selection on the American capital market than in Switzerland. Moreover, one can invest in segments such as high-yield bonds that aren't even available here – and they also offer substantial returns, making the costs of currency hedging more bearable.

However, the situation is different for equity investments. In recent years, and again this year, hedging against the dollar has paid off for Swiss franc investors.

In the long term, or with a long investment period, currency hedging for equities is not necessarily profitable, says Stiefelmeyer. "Younger investors with a long-term investment horizon should therefore not hedge currency risk." However, for investors who want to reduce portfolio fluctuations, currency hedging is also an option for equities – but they should be aware of the associated costs.

In this context, the spending plan regarding the currency is also important – a Swiss citizen who plans to spend his retirement in the euro area or in another part of the world may have less need to hedge the currency risk.

When investing in gold, however, Stiefelmeyer advises hedging currency risk. Historically, gold has often moved inversely to the dollar, a phenomenon known in technical jargon as a "negative correlation." For Swiss investors, this means that when the gold price rises, a weak dollar often reduces profits – and vice versa.