Volatility Spikes: Investors Must Adapt Currency Risk Management Strategies

Currency volatility has been on the rise in recent months, making it challenging for investors to manage risk in their portfolios. The past year saw divergent trends among major currencies, with some experiencing significant appreciation or depreciation.

The US dollar, for instance, weakened sharply in late-2025 due to Federal Reserve interest rate cuts and a softening labor market. It briefly touched a multi-year low of $1.26 against the Singapore dollar earlier this year but rebounded strongly by June amid robust equity and tech markets.

Other currencies, such as the Japanese yen and Malaysian ringgit, also charted highly volatile courses. The yen's brief appreciation in mid-2025 was short-lived, erasing all previous gains by June and hitting a 40-year low against the US dollar. In contrast, the ringgit staged a historic recovery after decades of depreciation, outperforming all Asian currencies last year.

Experts warn that investors should not rely solely on diversifying across different assets but also actively manage and diversify currency risk. Christopher Wong, FX strategist at OCBC, notes that portfolio concentration is a major risk, as even diversified portfolios can be exposed to common currency risks if most assets are denominated in the same currency.

Wong advises investors to be selective when hedging currencies and not aim to remove all currency risk but rather ensure no single currency has an outsized impact on the portfolio. Saktiandi Supaat, head of FX research at Maybank Securities, agrees that investors should diversify their portfolios across currencies with different economic drivers, combining relatively defensive currencies with selective exposure to cyclical currencies where valuations and fundamentals remain attractive.