Investing.com -- Investors holding excess U.S. dollars may want to reassess their currency exposure amid changing global market conditions, according to UBS.
In a note this week, the investment bank advised that now is a timely moment to evaluate whether U.S. dollar allocations exceed long-term portfolio targets and consider reallocating to home or alternative currencies.
“Over recent years, the U.S. dollar steadily strengthened,” UBS noted, adding that “as the tide turns—due to shifting growth differentials, changing policy expectations, and evolving global capital flows—investors are rethinking their currency exposure.”
UBS recommends starting with a review of future cashflow needs and aligning currency holdings with anticipated liabilities.
“For investors with large or recurring expenses… aligning the currency mix with anticipated needs can help manage potential currency risk,” the firm wrote. This becomes particularly relevant if the dollar weakens further.
When reallocating cash, UBS suggests weighing the trade-offs between yield, risk, and liquidity.
For example, the euro is said to stand out as “a practical choice for those seeking flexibility and stability,” while the Swiss franc and Japanese yen appeal to risk-averse investors.
For yield seekers with higher risk tolerance, UBS says emerging market currencies like the Brazilian real or Mexican peso offer higher returns, albeit with more volatility and liquidity concerns.
Gold is another diversification option. “Gold has tended to rise when the USD falls,” UBS noted, positioning it as a “hedge-not only against currency depreciation, but also against inflation and periods of negative market sentiment.”
While shifting out of the U.S. dollar can help reduce exposure to a weakening currency, UBS cautions that the right allocation “depends on individual objectives and preferences” and must be balanced with liquidity needs and risk tolerance.