Because of the ensuing dollar appreciation, only those European investors with a sizeable dollar allocation would have retained their buying power in the financial market, where most assets are priced in dollars.
The bigger picture
So, how should investors take exposure to foreign currency? The simplest solution would be to keep the money in money market funds, but that would mean investors foregoing any returns. Alternatively, they could gain exposure to foreign currency within their fixed-income portfolio, for example, by investing a proportion of their money in unhedged global bond funds.
This is how that works in practice: to hedge base currency risk, investors should buy share classes in several currencies of the same fund to gain the currency exposure they want. Investors in absolute return funds could take a similar approach, as such funds tend to aim to provide absolute returns in a specific currency only.
Some investors contend that, while they hedge their fixed income foreign currency exposure, they are exposed to foreign currency through their overseas equity holdings. This argument is true as long as they do not hedge these equity positions.
Large listed companies tend to have cashflows from all over the world, so it makes them less affected by one single currency move. That said, it will still be difficult to assess the clean currency exposure of a single company, let alone that of a whole index. But, as a rule of thumb, having a larger equity exposure reduces base currency risk.
Adding commodities to your portfolio would also help insulate against base currency risk. Gold and silver have a centuries-long reputation of protecting investors against losing purchasing power. And if we look at it in a broader picture, it is just these kind of assets that can protect purchasing power in the long run.
While base and foreign currencies may lose value over time, well-selected equity and precious metals will not, as long as they are unhedged. Therefore, hedge with care when you construct your portfolio.
