[Evidence of a prior currency trend does not mean that trend is likely to continue. Investors should seek their own independent advice and consider their risk appetite and personal circumstances.]

The chart below shows how the AUD has fallen against the USD over 10 years.

Source: Bloomberg, Betashares. As at 5 February 2025.
 

How did the AUD get there?

The AUD resumed a decade-long downtrend in early 2021 due to differing growth and inflation dynamics between Australia and the US.

The post-COVID rise in inflation prompted the US Federal Reserve to raise interest rates significantly to a target range of 5.25% - 5.50%. 

Consequently, the US dollar strengthened relative to other major currency pairs and was also supported by concerns of inflation being ‘sticky’ (or persistently high) and resilient economic growth in the US.

Compare that to the Reserve Bank of Australia (RBA) which also raised interest rates, but not to the same extent as the US. 

Australia’s economy was instead recovering more slowly after COVID with cost-of-living pressures affecting lower-income households disproportionately, and the broader consumption channel that drives economic growth in Australia.

Additionally, the RBA took a more cautious approach to raising interest rates given the wider prevalence of variable rate home loans in Australia. 

While headline inflation in Australia rose, as it did in the US, overly restrictive interest rates can place significant stress on the Australian housing market which may have had negative social and economic implications – an outcome the Australian government would not like to see, in Betashares’ opinion.

More recently, the USD has continued to propel higher while the AUD has made fresh post-pandemic lows following Trump’s election victory in November 2024. 

Higher tariffs and broader trade uncertainty strengthen ‘safe-haven’ currencies like the US dollar while more cyclical currencies like the AUD have weakened.
 

Can the AUD rise from here?

In Betashares’ opinion, there are catalysts for the AUD to inflect higher from here. The greenback appears elevated, and on most fundamental currency metrics like purchasing power parity, the USD is considered fairly expensive.  

A persistently strong US dollar also comes at odds with the trade goals of the Trump administration - namely to reduce the US’ trade deficit with major trading partners, such as China and Europe, in a bid to revitalise domestic industries and create domestic jobs under a populist ‘America First’ agenda.

Corporate earnings from US multinationals could also be affected as many derive a significant portion of their revenues from abroad. This could weigh on the US sharemarket, which would be at odds with Trump’s market-friendly stance.

Meanwhile, the AUD might receive support as the Chinese government rolls out expansionary stimulus measures in a bid to restore policy credibility and market confidence, which may improve risk sentiment and broader commodity prices. 

Betashares’ view is that these developments could catalyse a mean reversion in the Aussie dollar which is currently ~13% below its 10-year average (of around US$0.72 to 31 December 2024) at time of writing. 
 

Risks of currency hedging

However, forecasting the direction, magnitude and timing of currency movements is very hard to get right. So, for investors who don’t hold a view on currency, is the best approach to just hedge your global equities exposure, or not, and pay extra costs to do so.

In short, there are pros and cons to either approach. Based on Betashares’ analysis of historic data, there could be a case for currency hedging a portion of a portfolio’s global equities exposure from a return and volatility perspective.

For Australian investors, leaving a portion of your global equities exposure unhedged can lower portfolio volatility and drawdowns in periods of strong equity market pullbacks. 

This is because the AUD is generally seen as a ‘risk on’ currency, whereas the US dollar is often regarded as ‘safe haven’ currency which historically has tended to appreciate in periods of market sell-offs.

We see evidence of this in the chart below. During the COVID market sell-off in March 2020, an unhedged global equities index experienced a smaller drawdown (fall) (-20%) than a hedged index (-33%).
 

Comparison of same global equity index unhedged and hedged
for currency during March 2020 market sell off

Equity indices indexed to 100 as at 31 January 2020

Source: Bloomberg. 31 January 2020 to 1 June 2020. Global equity index hedged represented by Solactive GBS Developed Markets ex Australia Large & Mid Cap Index AUD Hedged. Global equity index unhedged represented by Solactive GBS Developed Markets ex Australia Large & Mid Cap Index. You cannot invest directly in an index. Past performance is not an indication of future performance of any index or ETF.

Trend can be your friend, or foe

If remaining unhedged or having a lower level of currency hedging is better from a drawdown and risk standpoint, what about portfolio returns?

Over the 35-year return period that Betashares analysed, the AUD started and finished around US70c, and as a result the historic portfolio returns at all levels of currency hedging were approximately the same . 

However, within this multi-decade period, we witnessed a number of 5 to 10 year periods where the AUD/USD trended strongly, both higher and lower. 

For example, the AUD rallied significantly from US$0.50 in December 2001 to nearly US$0.90 in December 2007. Over that time period, the S&P 500 Index returned 42% in USD terms, but if an Australian investor held the S&P 500 Index unhedged, their return would have been -17% in AUD terms. 

This illustrates the potential negative effect on investor capital that currency can wreak – a point often forgotten, given the last decade has witnessed twin tailwinds of strong global equity performance and a weakening AUD.

Betashares considered the return implications of currency hedging over different 5-year timeframes going back to 1988, where AUD appreciation or depreciation could have had a significant impact on overall outcomes for a hypothetical diversified portfolio.

The chart below shows the range of 5-year total return outcomes over the period 1988 – 2024 as a result of using different percentages of currency hedging for the global equity allocation (between 0 and 100% hedged).

The range of return outcomes indicates the degree to which currency could impact investor outcomes (both negatively and positively). If an investor’s objective is to lower the impact of currency on long-term returns, they might consider an investment strategy with a lower outcome range.
 

Range of 5-year* return outcomes for a hypothetical balanced portfolio
based on global equities currency hedging level

January 1988 to December 2024

* Period from December 2018 to December 2024 represents a 6-year return period. Source: Bloomberg, Betashares. Past performance is not an indication of future performance. Provided for illustrative purposes only. Not a recommendation to invest or adopt any investment strategy. The full set of assumptions in relation to this chart are set out at the end of this article. 

Historically, Betashares found that being completely unhedged or 100% hedged increased the return outcome uncertainty. Where the level of currency hedging employed was between 30% – 80%, there was far lower variability between the minimum and maximum 5-year return outcomes.
 

To hedge or not to hedge?

Investors with a view that the AUD is set to appreciate can choose to express a tactical view by increasing the hedged portion of their global equities' portfolio.

For those not wishing to express a tactical view on currency, Betashares analysis suggests an approach of currency hedging a portion of a global equities' allocation might reduce the variability of long-term return outcomes. 

The Betashares Investment Committee currently adopts a 30% currency hedged allocation to global equities within the Strategy Asset Allocation (SAA) for Betashares Managed Accounts.

As markets embrace more currency volatility under greater geopolitical and policy uncertainty, it is important for individual investors and their advisers to determine the level of currency hedging most suited to their own risk tolerance and objectives.

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Assumptions for range of 5-year total return outcomes for hypothetical balanced portfolio:

• Portfolio returns are based on cash, Australian and global equities, and Australian and global bonds using weights for the Betashares strategic balanced portfolio, illustrated below, as at December 2024:
  • 50% defensive (5% cash, 27% Australian fixed interest, 18% international fixed interest)
  • 50% growth (2.5% listed international infrastructure, 20% Australian equities, 27.5% international equities)
  • The balanced portfolio is rebalanced quarterly
• The level of hedging on the global equities exposure varies from 0% to 100%. Calculations are based on data taken as at 1 December each year from January 1988 to December 2024, when asset return performance is available on the global equities exposure.
• No currency hedging on the global bonds exposure.