Currency Hedging in Focus as Volatility Bites

Fund managers and corporates are responding to the increase in FX volatility thanks to rising geopolitical tensions, by increasing their focus on their currency hedging activities, although as yet, activity does not appear to be radically different from 2024.

MillTechFX has launched its Global FX Report 2025, a new report based upon surveys of 750 leaders at corporates and 750 at fund managers (although entitled ‘global’, the report only surveys in North America, the EU and UK). The new report likely consolidates the regional reports the firm publishes regularly throughout the year.

Unsurprisingly, firms are very keen to hedge their known currency exposures, with 86% of fund managers and 81% of corporates doing so. As this is the first global report published by the firm year-on-year comparisons are tricky, however in four reports covering UK and US corporates and fund managers in Q2 2024, those looking to hedge were a similar percentage.

Equally, while uncertainty is clearly in play in markets, the average hedge ratio (49%) and average tenor of those hedges (5.3 months), are both similar to 2024. In its 2024 UK Corporate CFO report, MillTechFX found an average hedge ratio of 49% for 5.55 months, while in the US report it was 49% for 5.05 months.

The corporate survey finds that 86% of European corporates hedge FX risk, followed by North America at 82% (gyrations in US-Canada relations will probably be propelling a large portion of this), and the UK at 76%. Overall, across all regions, of those corporates that do not hedge currently, 52% said they were “considering” it.

The report finds that 93% of North American corporates were “affected by the strong dollar”, and that 91% said the strong dollar had positively affected their competitive position in world markets, but given the dollar has given up almost 5% in 2025, this number would now probably be lower.

In light of geopolitical tensions, 62% of corporates said they plan to increase their hedge length and 8% decrease it, while 30% plan to decrease the hedge ratio and 29% increase it.

Corporate treasurers are perhaps not the best place to go to predict the impact of geopolitics, however, because 84% of European corporates were optimistic that the Trump administration would have a positive impact on their business, as were 81% of UK firms. Although slightly less so, 70% of North America corporates felt the same way. MillTechFX does add a note to the report advising the survey was taken before the threat of 25% tariffs…

MillTechFX surveys continue to bang the drum for a perceived “lack of transparency” in FX pricing, suggesting the survey largely targets small and medium enterprises, it says 29% of North American corporates cite this challenge. Somewhat paradoxically, the survey also finds that securing credit lines and onboarding liquidity providers is a big challenge – again suggesting the survey is largely taken by these smaller firms – and also talks about best execution, something that is probably an alien concept to pure hedgers. This is reinforced by the finding that 34% of corporates still use the phone, 32% use email to instruct, and 30% upload files. It is hard to compare prices in these conditions…

Somewhat bizarrely, given how more than 90% of trades seem to be via phone, email or file upload, the survey also finds that 100% of corporates said they were exploring AI, largely for risk management and FX operations.

For all the talk of increasing hedging activity, one problem remains for corporates it seems – the cost of hedging. Around 80% say their cost of hedging has risen – that will happen in volatile markets – and 50% of respondents said this was a reason not to hedge risk. Other reasons given were “burdensome hedging infrastructure” at 44%; minimal exposure for 40% and capital better deployed elsewhere (42%).

Fund Managers Ponder Cost of Hedging

As noted, 86% of fund managers surveyed are hedging their FX risk, however unlike corporates, those who are not hedging seem content with their decision. While 43% of those who do not hedge are considering do so, 57% say they are standing pat, especially in North America, where 84% said they wouldn’t change. Across the regions, 41% said they don’t hedge because capital is better deployed elsewhere, 36% that it is too expensive to hedge, 33% because they have minimal exposure and 29% due to the “burdensome hedging infrastructure”.

As was the case with corporates, 84% of fund managers said their cost of hedging had gone up over the past year. In spite of this, or perhaps because of it, 59% say they plan to increase their hedge length and 37% their hedge ratio. While 17% plan to decrease their hedge ratio and 6% their hedge length, 48% are happy with their hedge ratio and 33% with their length.

Calculating FX transaction costs appears to be a problem for a significant minority of respondents, with 30% of managers raising this issue as the biggest challenge for their FX operations. Manual processes were cited by 30%, 29% thought a big challenge was onboarding new liquidity providers and 26% getting comparative quotes.

Again, transparency is raised, the report states that “fund managers often trade with just one or two banks due to the complexity of managing multipole banking relationships” and that they are “constantly hit with hidden costs, particularly those that are hidden in the spread”.

As was the case with corporates, the survey finds that 31% use email to instruct FX deals, 29% the phone and 29% uploading files – again the question has to be asked, how a firm can compare quotes in such an environment? In Europe 96% of managers were investigating AI, as are 91% in the UK. No finding is given for North American firms.

“The US administration’s shifting policies and rising trade tensions are intensifying market uncertainty,” says Eric Huttman, CEO of MillTechFX. “Given the influence of US policy on global markets, it’s no surprise that these dynamics are driving significant macroeconomic shifts particularly in FX markets.

“Our research shows that the vast majority of corporates and fund managers globally are hedging their FX risk and protecting their bottom lines,” he continues. “We’re also seeing fairly consistent hedge ratios and tenor lengths, as firms move to lock in certainty for longer and ride out the storm. This is despite rising hedging costs which are putting many CFOs across the globe off as they decide to take their chances, rather than lock in security and forgo long-term protection for short-term gain.

“For those that decide to hedge, it can seem difficult to implement,” Huttman concludes. “FX hedging has long been plagued by inefficiencies, hidden costs, and a lack of transparency, forcing CFOs to rely on outdated manual processes. However, a shift is underway as firms embrace tech-enabled solutions that digitise and automate the entire FX process, from onboarding to execution and settlement. Those who move away from legacy infrastructure stand to gain greater efficiency, cost savings, and control, while those who don’t risk being left behind.”

Nick Wood, head of execution at MillTechFX, adds, “Currency volatility remains a defining theme in 2025, driven by tariffs, geopolitical tensions, and shifting economic policies. The strengthening USD reflects inflationary expectations and US political divergence, while trade disputes and global conflicts continue to reshape capital flows. The return of President Trump has introduced a more transactional approach to foreign relations, impacting key alliances and market stability. Meanwhile, China’s economic strategy, Japan’s policy shifts, and political uncertainty in Europe add further complexity. As investors navigate these macroeconomic forces, currency markets are expected to remain highly reactive throughout the year.”