Currency Strategies for Cross-Border Investors: Reducing Risk in UK-US Portfolios
For high-net-worth UK expats living in the United States, currency exchange is more than a technical detail. It is a key driver of portfolio performance. Shifts in the pound-to-dollar exchange rate can have a significant impact on both returns and risk exposure.
Whether you are drawing income from the UK, holding investments in sterling, or planning to transfer assets to the US, understanding how to manage currency risk is essential for protecting long-term wealth.
Why Currency Risk Matters
Cross-border investors face a challenge that domestic investors do not: exposure to exchange rate fluctuations.
- Sterling vs. dollar volatility: Political and economic events can move the GBP/USD exchange rate quickly, sometimes by several percentage points in a matter of weeks.
- Impact on portfolio value: Gains in UK assets may be reduced when converted into dollars if the pound weakens, and vice versa.
- Income planning: Retirees drawing income from UK pensions or investments may see their purchasing power fluctuate with exchange rates.
Strategies to Manage Currency Risk
There is no single solution to eliminating currency risk, but a combination of strategies can help mitigate its impact.
1. Currency Diversification
Holding a mix of assets denominated in both sterling and dollars can reduce reliance on a single currency. Allocating across regions and sectors also helps spread risk.
2. Currency Hedging
Some investment funds and ETFs offer hedged share classes that limit exposure to exchange rate fluctuations. For example, a sterling-based fund with a USD-hedged class allows US-based investors to reduce volatility.
3. Staged Transfers
Instead of moving large sums in a single transfer, spreading transactions over time can help smooth out the effect of short-term market swings.
4. Forward Contracts
Currency providers may allow you to lock in an exchange rate for a future transfer, providing certainty over how much you will receive. This can be useful for large transfers, such as property sales or inheritance proceeds.
5. Aligning Currency with Spending Needs
Where possible, align the currency of your assets with where you expect to spend them. If you plan to retire in the US, gradually shifting more assets into dollar-denominated investments can reduce long-term mismatch risk.
Tax and Reporting Considerations
Managing currency also comes with compliance requirements:
- Capital gains in the US: The IRS requires gains and losses to be calculated in dollars, which means exchange rate movements can create taxable events even when no gain exists in sterling terms. Capital gains are calculated using spot rates on the acquisition basis and when a realization event occurs. Exchange rate movements alone, without a realization event, do not in themselves expose the investor to capital gains tax (CGT).
- Foreign accounts: UK bank or investment accounts holding sterling may need to be disclosed on FBAR and Form 8938 if thresholds are met.
The Bottom Line
Currency risk is a fact of life for cross-border investors, but it does not have to undermine your wealth strategy. With the right mix of diversification, hedging, and planning, you can reduce volatility and protect your long-term goals.
At BlackPoint Capital Partners, we help clients build strategies that account for both investment performance and currency management, ensuring that portfolios work effectively across the UK and US.
Some of the content of this communication was provided by third parties of BlackPoint Capital Partners. We have not verified the information contained herein, but we believe the content is reliable. None of this content should be construed as legal, accounting or tax advice. Tax laws are complex and often have highly-individualized requirements, you should seek the advice of a competent tax professional if you have specific tax questions.
