Why Foreign Currency Diversification Matters for Your Portfolio

By Lee Sheung Un

In an increasingly interconnected world, financial security is no longer just about growing your wealth—it’s also about preserving it. Investors who have all their investments in a single currency may find themselves exposed to risks they never considered, from inflation and interest rate fluctuations to geopolitical uncertainties.

Currency diversification can be a pivotal strategy that helps investors mitigate these risks, while offering growth opportunities across global markets.

Why a Single Currency Approach Falls Short

Investing in a single currency concentrates risk within a single market/economy. Local interest rate policies, inflation trends, and economic cycles all influence the purchasing power of that currency. If that specific country faces economic instability or its currency depreciates significantly, investors relying solely on domestic assets may see their wealth erode in real terms.

Take, for instance, the US Dollar (USD). In the early 1980s, aggressive monetary tightening pushed US interest rates to nearly 20%, strengthening the dollar. However, this strength led to trade imbalances, prompting the Plaza Accord in 1985, where major economies intervened to weaken the dollar. Over the next two years, the USD depreciated by 40–50% against the yen and Deutsche Mark, significantly impacting portfolios concentrated in USD.

Similarly, in the early 2000s, weak economic data, geopolitical uncertainty from the Iraq invasion, and rising confidence in the euro drove another period of USD weakness. Emerging market central banks began diversifying reserves, reducing USD holdings in search of better yields. Fast forward to 2024, higher US Treasury yields, and trade policies have fuelled renewed dollar strength.

These cycles highlight the volatility of even the world’s reserve currency—reinforcing why investors should diversify across multiple currencies to preserve value and hedge against currency fluctuations.

Diversification: A Shield Against Currency Volatility

A multi-currency approach mitigates this risk by spreading exposure across different economies, reducing the impact of adverse market movements in any single region.

For example, if an investor’s home country experiences an economic downturn, their domestic investments may decline in value. However, if they hold assets denominated in more stable or counter-cyclical currencies, they can cushion losses and maintain purchasing power.

Consider an investor holding a mix of USD, SGD, and EUR-denominated assets alongside local investments. A depreciation in MYR may reduce the value of domestic holdings, but gains in foreign-denominated investments could offset some of these losses, ensuring overall portfolio stability.

Case Example | Single Vs Multi-Currency Approach

To understand the impact of currency diversification, consider 2 investors who start with the same initial capital—MYR 1 million. One chooses to keep their entire portfolio in MYR, while the other diversifies across multiple currencies.

Assumptions: Year 1 to Year 10 simulated with data from December 2014 to December 2023 respectively. Local deposit rates applied to respective currencies during holding period. Source Bloomberg, as of 31 December 2024.

In Scenario 1, the investor holds everything in MYR. Over a 10-year period, the portfolio grows to MYR 1.32 million. However, when measured in gold terms—a proxy for real value preservation—it equates to just 139 ounces of gold.

In Scenario 2, the second investor allocates 25% of their portfolio to MYR, USD, SGD, and AUD. Over the same period, this diversified portfolio grows into a mix of different currencies:

• MYR 258,000
• AUD 90,000
• SGD 94,000
• USD 71,000

When converted into gold, this portfolio is worth 156 ounces of gold, a notable improvement over the single-currency strategy.

By holding multiple currencies, the second investor benefits from a broader economic exposure, reducing the risks associated with inflation, currency depreciation, and domestic economic slowdowns. Diversification allows for better wealth preservation over time, ensuring that purchasing power is not eroded by the fluctuations of a single currency.

Investing Beyond Borders

Contrary to belief, foreign currency diversification is not just about trading forex—it’s about building a resilient portfolio that can weather economic uncertainties and capitalise on global opportunities.

By spreading investments across multiple currencies, investors can enhance value preservation, reduce concentration risks, and optimise long-term returns.

Lee Sheung Un is the Manager of Content & Communications at AHAM Capital. A qualified accountant (ACCA), he focuses on delivering clear and thoughtful insights on markets and investments.