Currency Risk in Investing: How GBP/USD Moves Hit US Shares

If you own US shares from outside America, you are running two bets at once — and only one of them is about the companies. The second bet is currency risk in investing: the chance that a move in the exchange rate quietly adds to, or eats into, whatever the shares themselves do. Get the market call right and the currency wrong, and your account can still go backwards.

Here is the part most beginners miss. In 2022 the S&P 500 fell 18.1% in dollars, one of its worst years since 2008. Yet a UK investor holding the same index in an ordinary unhedged fund lost roughly half that. Nothing about their stock-picking was better. The pound had simply fallen against the dollar, and that move handed sterling investors almost ten percentage points back.

That is currency risk working for you. It works against you just as easily. If you want to hold US names properly, a structured ETF investing course will show you how the exchange-rate layer sits underneath every fund you buy — and how to decide whether to leave it alone or hedge it.

What is currency risk in investing?

Currency risk is the risk that a change in the exchange rate alters the value of a foreign investment. Buy US shares in pounds and your money is converted to dollars to hold them, then back to pounds when you sell. If the dollar weakened in between, you get fewer pounds back — even if the share price never moved.

It is sometimes called FX risk or exchange-rate risk. It applies to every unhedged foreign holding you own: individual US stocks, an S&P 500 tracker, a global fund, even a US-listed ETF bought through a UK or European broker.

Your real return is two returns stacked on top of each other

Think of any foreign holding as two moving parts. The first is the asset return — what the shares or the index actually did in their home currency. The second is the currency return — what the exchange rate did over the same period.

Your total return is the two multiplied together, not simply added. A 10% gain in US shares alongside a 5% rise in the dollar versus the pound is not a 15% return — it is 1.10 × 1.05 − 1 = 15.5%. The effect compounds, and over volatile years the currency leg can be as large as the market leg.

This is exactly why two investors can hold the identical fund and report different returns: one measures in dollars, the other in pounds. Neither is wrong. They are simply standing in different currencies. If you are new to holding American names from this side of the Atlantic, our guide to buying US stocks from the UK walks through the account and tax mechanics that sit alongside this currency layer.

The 2022 proof: a falling pound rescued a brutal year

2022 is the cleanest real-world lesson in currency risk you will find, because the two legs pulled hard in opposite directions.

The S&P 500 delivered a total return of −18.1% in dollars — a genuinely bad year for a US-based investor. But over the same year the pound fell about 10.5% against the dollar, sliding from roughly $1.35 at the start of the year to near $1.21 by the end, after touching an intraday low of $1.0352 in late September.

For a UK investor holding an unhedged S&P 500 fund, that weaker pound meant every dollar of their holding was worth about 11.8% more in sterling by year-end. Stack the two together: (1 − 0.181) × (1 + 0.118) − 1 ≈ −8.5%. The currency handed back close to ten percentage points of the loss.

What to do with this: do not read it as "currency always saves you." Read it as "currency is a second, independent driver of your return." In 2022 it cushioned a fall. In a year when the pound rises against the dollar, the same effect works in reverse and shrinks a US gain. The lesson is to know the exposure is there before it surprises you. It is also why comparing US and UK index returns is rarely apples-to-apples — see how to invest in the S&P 500 from the UK without misreading the headline number.

How far can the pound actually move against the dollar?

Investors who dismiss currency as noise usually assume it moves a percent or two a year. History says otherwise. Sterling has swung across an enormous range against the dollar since it began floating freely.

Source: KeyCurrency.co.uk and ExchangeRates.org.uk, 2024; September 2022 low from ExchangeRates.org.uk, 2022.

From $1.05 to $2.65 is more than a two-and-a-half-fold range. Even inside a single decade, a move from $1.35 to $1.20 — ordinary by historical standards — changes the sterling value of an unhedged US holding by more than 12%. As of August 2026, GBP/USD sits around $1.36, near the top of its recent 12-month band of roughly $1.30 to $1.39.

What to do with this: size the exposure honestly. If US assets are a large slice of your portfolio, a double-digit currency swing is a portfolio-level event, not a footnote. That is the moment to decide, deliberately, whether you want that exposure or want to neutralise it.

Should you hedge your US shares?

Hedging means using currency contracts inside a fund (a currency-hedged share class) to strip out the exchange-rate move, so your return tracks the US index in your home currency. The alternative — leaving it exposed — is unhedged. Neither is "safe" or "risky" in the abstract; they suit different jobs.

Source: Vanguard Research, "The portfolio currency-hedging decision," 2018; UBS Asset Management, "Understanding ETF currency hedging," 2025.

The research consensus is less wishy-washy than it sounds. Vanguard's work argues that long-term investors should generally accept the currency exposure on their international equities, because it lowers the correlation with home-market shares and offers a partial hedge against domestic inflation. For international bonds, the same research says hedge it — unhedged the currency swing can push a bond fund's volatility toward equity-like levels. For a deeper product-level view, our guide to currency-hedged vs unhedged ETFs compares the two share classes directly.

What to do with this: match the tool to the horizon. A 25-year retirement pot invested in global equities has time for currency swings to wash out and benefits from the diversification — leave it unhedged. Money you will spend in pounds in two years should not ride on the exchange rate — hedge it, or do not hold it in dollars at all.

What currency hedging actually costs

Here is the catch most fund factsheets bury: the real cost of hedging is not the headline fee. It is the cost of carry — the interest-rate difference between the two currencies.

Hedging works through short-dated currency forwards, and their pricing bakes in the rate gap. When you hedge a higher-yielding currency (say the dollar) back into a lower-yielding one, you pay away that differential; when the gap narrows or flips, the same trade can even earn you a small positive carry. So a hedged US fund does not simply track the index minus a tiny fee — it tracks the index minus (or plus) the rate spread, which shifts as central banks move.

Investors clearly think the trade-off is worth it in some cases: assets in European currency-hedged ETF share classes grew from $56.8 billion in 2017 to $283.8 billion in 2025. But that growth is concentrated where hedging earns its keep — shorter horizons, bond exposure, and portfolios with a defined home-currency liability — not blanket equity hedging.

When currency risk helps you — and when it quietly bites

Currency risk is not one-directional, and that is the whole point. It helps when your home currency weakens against the dollar while you hold US assets — 2022 is the textbook case. It bites when your home currency strengthens: a rising pound shrinks the sterling value of every US holding, even in a flat market.

Two things soften the blow over time. First, in a globally diversified portfolio, currency moves partly offset each other — not every foreign currency moves the same way at once. Second, over long horizons the asset return tends to dominate: a decade of S&P 500 compounding usually swamps a single year's exchange-rate wobble, which is why long-term equity investors are advised to accept the exposure rather than pay to remove it.

The mistake is not choosing unhedged or hedged. The mistake is not realising you chose at all — buying a US fund, assuming your return equals the index, and being blindsided when the exchange rate rewrites the number.

Frequently asked questions

This article is educational content, not investment advice. All investing carries risk to your capital, exchange rates can move against you, and past performance is not a guide to future returns.