Owners of global capital rarely have assets, income, and expenses denominated in a single currency: an account in dollars, real estate in euros, children's education in pounds, retirement in a third country. Managing this currency diversity is a separate discipline in which the choice of base currency, understanding of risk, and careful hedging are important.
Where the Currency Question Came From
Until the early 1970s, major currency exchange rates were held in a narrow corridor around the dollar under the Bretton Woods system, and currency risk was barely felt by private capital. After the abandonment of the dollar's peg to gold in 1971–1973, exchange rates became floating, and any owner of assets outside their own country began to bear this risk—whether they hedged it or not. For global capital, this has long been a permanent background condition.
Over the next half-century, a deep market and set of instruments grew around this task—forwards, options, swaps, multi-currency accounts. Initially used by corporations and banks, today they are available to private clients through private banking and international brokerage accounts. The question has shifted from "can currency be managed" to "in what volume and at what cost."
Base Currency
The first step is to determine the reference currency, that is, the currency in which the family measures its wealth and evaluates profits and losses. It makes most sense to tie it to future obligations and major expenses: if the main expenses are expected in euros, then it is reasonable to measure capital in euros, otherwise exchange rate fluctuations will distort the picture of returns.
Currency Risk of Capital
A mismatch between the currencies of assets and obligations creates an independent risk. A portfolio in dollars with expenses in euros may show growth on paper while simultaneously losing purchasing power if the dollar weakens against the euro. This risk exists even for a conservative investor who holds "safe" instruments in a currency other than the one in which they plan to spend.
Natural Hedge
The most sustainable way to reduce currency risk is to match assets to future expenses. Funds for education are held in the currency of the country of study, a reserve for living in Europe—in euros, and so on. Such alignment removes a significant portion of risk without derivative instruments and their associated costs.
Hedging Instruments
- Multi-currency accounts: storage and settlements in multiple currencies with conversion close to market rates.
- Spot conversion: immediate exchange at the current rate.
- Forwards: fixing the rate for a future date to lock in the cost of an upcoming payment in advance.
- Options: protection against adverse movement while preserving the benefit of favorable movement, for a premium.
- Currency-hedged fund share classes: built-in hedging of currency risk within the instrument.
Market Context
The foreign exchange market is the largest and most liquid in the world: according to the BIS triennial survey, in April 2025 average daily turnover reached approximately $9.6 trillion—almost a third more than in 2022, and the dollar remained on one side of approximately 89% of all transactions. For major pairs (dollar, euro, pound, yen, franc), spreads are minimal and hedging is easy. For emerging market currencies, spreads are wider, liquidity is lower, and the risk of devaluation and currency restrictions is higher.
Costs and Pitfalls
Hedging is not free: conversion costs the spread, forwards and options cost money and attention, and excessive hedging eats into returns. A separate danger is concentration in an emerging market currency with the risk of sharp depreciation and withdrawal restrictions. A reasonable goal is not to eliminate currency risk completely, but to bring it to a level that corresponds to the family's real plans.
What It Looks Like in Practice
Take a family with a base currency in dollars: children study in the UK, and an apartment has been purchased in France for management. Known near-term expenses are tuition payments in pounds three to four years ahead and property maintenance in euros. It makes sense to hold pounds and euros in the required amounts for these: this is a natural hedge for dated obligations. The same principle works for the currency of dividend flows from holding structures. The long-term investment portfolio remains in the base currency and is globally diversified.
A common mistake is the opposite: the family holds everything in their home currency "because that's what they count in," while actual future expenses are in euros and dollars. This creates a hidden bet against those currencies the size of all savings. The mirror extreme is to overdo hedging: fixing forwards twenty years ahead and paying forward points at each roll for a risk that may not materialize at all. The size of forward points is determined by the interest rate differential between currencies, so long hedging of a high-yield currency is especially expensive.
Regulation and Taxes
Currency hedging instruments are not outside regulation. In the EU, access to currency derivatives is determined by client classification under MiFID II—retail, professional, or eligible counterparty. For retail clients, ESMA limits leverage: 30:1 for major currency pairs, 20:1 for non-major pairs and gold, down to 2:1 for cryptocurrencies. Professional clients, which typically include family office structures, are not subject to these limits and receive finer pricing and broader access to products. Spot exchange itself is not considered a MiFID instrument, but forwards and options for investment purposes are.
Over-the-counter derivatives also carry reporting requirements. Under EMIR in the EU, since the entry into force of REFIT standards on April 29, 2024, transactions are transmitted to trade repositories with LEI identification; when a client trades against a bank as a financial counterparty, the bank typically reports for both sides. Multi-currency and foreign accounts are separately visible to tax authorities through CRS and AEOI—more on this in the CRS overview.
Exchange rate differences can be taxable, and the regime differs sharply by country. In the US, §988 treats most currency gains as ordinary income, with a de minimis threshold of $200 per personal transaction. In the UK, since April 6, 2012, gains on withdrawals from personal currency accounts have been excluded from capital gains tax. Therefore, the after-tax result of hedging must be calculated in the coordinates of your country of tax residency.
Where the Topic Is Heading
The market has become larger and even more dollar-centric: BIS records $9.6 trillion in daily turnover and the dollar on one side of 89.2% of transactions. Even diversification out of the dollar is executed through dollar pairs. 2025 reminded us that currency is a live risk: the DXY dollar index lost about 10–11% in the first half—the worst half-year since 1973—amid Fed rate cuts and tariff uncertainty. A portfolio "in dollars" lost about a tenth of its value in terms of euros or francs, even though no asset in it moved.
At the same time, new rails for multi-currency settlements are emerging: stablecoins and tokenized deposits provide almost instant transfer of value between currencies, and in the EU the circulation of euro and dollar stablecoins is already regulated by the MiCA regime; over time, CBDCs will be added. More on the digital part of the portfolio in the material on crypto assets in private wealth. This is a potentially cheap way to move money between currencies—with the same compliance and tax questions as with traditional accounts.
The overarching message is one: currency management is a constant background task of global capital. Instruments are improving, but the discipline remains the same—determine the base currency, cover known obligations, monitor costs and taxes.
This material is for informational and analytical purposes only and does not replace individual investment, legal, or tax advice.