Ask the experts: What is stirring our clients (and moving the financial markets) in May 2025

We are always available to our customers for concerns and questions about their portfolios. As a representative of this, once a quarter we summarize the most frequently asked customer questions and the answers provided by our experts, thus giving you direct insights into our asset management and investment advisory services.

Currencies

The US dollar and the euro have depreciated sharply against the Swiss franc in recent weeks. Should Swiss investors hedge their foreign-currency asset holdings? 

Kaiser Partner Privatbank: To hedge or not to hedge? When it comes to assets denominated in foreign currencies, that’s habitually the question, particularly for investors who use the Swiss franc as their reference currency because in the long run, the franc has continually appreciated against all relevant currencies over the past several decades, gaining around 2.1% per annum on average against the US dollar, for example, over the last 50 years. That has diminished returns for Swiss investors (after conversion into their home currency).

Currency hedging may be sensible in principle for another reason as well. That’s because a foreign currency also means additional risk in the form of heightened volatility, which can work both for or against an investor. For example, the brief bear market in the USA in 2022, during which the S&P 500 index corrected for a time by 25% at its nadir, was only around half as painful for investors who think in Swiss francs because it was accompanied by considerable US dollar strength, which limited the maximum drawdown to 13% in CHF terms. The exact opposite has been happening thus far in 2025. The selloff on the US stock market since early this year has been accompanied by an extremely weak US dollar, which has worsened the share-price declines for investors on the old continent.

Added volatility | A strong/weak US dollar mitigates/worsens US stock-price drawdowns

Maximum drawdown S&P 500 in different currencies

Sources: Bloomberg, Kaiser Partner Privatbank

So, it’s a clear matter, isn’t it?! By hedging currencies, you protect your return against weak foreign currencies and are able to sleep easier thanks to the resulting lower volatility. Unfortunately, however, it’s not quite as simple as that. Although the “sounder sleep” argument is correct, bear in mind that hedging against currency risk doesn’t come for free. The hedging costs are essentially determined by the size of the interest-rate differential between the foreign currency and the home currency (the Swiss franc). And that’s where the “problem” lies: the franc is a notorious low-interest-rate currency, so the cost of hedging against currency fluctuations usually has been correspondingly high in the past. In the aforementioned example using the USD/CHF pair, the currency hedge cost an average of 2.8% per annum over the last 50 years. The insurance against a weak dollar thus cost more than the actual depreciation of the greenback; on the bottom line, investors with a currency hedge during that period paid an insurance premium 0.7 percentage points too high. The calculation looks a bit different if one takes the last 35 years as the observation period. During that time frame as well, the US dollar depreciated against the franc by an average of 1.5% per annum, but the hedging cost since 1990 for an investor thinking in Swiss francs was lower than in the 50-year period and likewise amounted to 1.5% per annum. The currency hedge thus yielded no benefit, but there were also no opportunity costs caused by overly expensive insurance.

Not for free | Hedging against Swiss franc strength costs some return in the long run

Analysis of value erosion

Sources: Bloomberg, Kaiser Partner Privatbank

The examples demonstrate that if the cost of hedging, i.e. the interest-rate differential, exceeds the expected appreciation of the Swiss franc, then it doesn’t pay for an investor to hedge, at least not from a return standpoint. If the cost of hedging is lower or similarly as high as the expected appreciation of the franc, then it makes sense to hedge the currency risk. The expected appreciation of the Swiss currency is the one question remaining – a tried-and-tested yardstick for gauging it is the expected inflation differential between Switzerland and the foreign currency area. It historically has stood at 1 to 2 percentage points versus the USA and the Eurozone, and it seems realistic to assume an inflation differential of that magnitude for the years ahead as well. A simple set of guidelines can be derived from this reasoning to answer the question of whether or not to hedge (see table).

Going by this guidance, it evidently does not make sense at the moment to hedge against a strengthening of the Swiss franc due to return considerations. The cost of hedging, i.e. the interest-rate differential, is too high for that at present, amounting to around 4% in the case of the US dollar and around 2.5% in the case of the euro. At the moment, the ones who should hedge are mainly those investors who have a short investment horizon or who value low portfolio volatility more than a maximum possible return.

Particularly expensive | Cost of hedging currently at a high level

Annual cost of hedging Swiss franc (vs. US dollar and euro)

Sources: Bloomberg, Kaiser Partner Privatbank

Currencies

Does the US dollar risk losing its status as the world’s reserve currency?

Kaiser Partner Privatbank: In the summer of last year, we asked in this space whether Donald Trump could fulfill his wish for a weak US dollar. Our conclusion at that time was: “Evidently, there is a dearth of “good” options for structurally weakening the US dollar. Trump’s fascination with tariffs is also unhelpful to his desire for a weak currency because economic theory and academic evidence suggest that raising tariffs on imports leads to a stronger domestic currency.” In recent months, though, the Trump administration manifestly has succeeded after all in substantially devaluing the greenback despite brandishing the tariff cudgel, or perhaps exactly because it has done that. In any case, objectively it is fair to say that despite the putative success in weakening the currency, the tactics employed to achieve that goal were not a “good option” because the dollar’s dip is actually based on a massive loss of confidence in the world’s reserve currency. Trump’s unconventional policies put the USA’s public finances and economic growth prospects at risk. They also call the US Federal Reserve’s independence and America’s relations with allies and trade partners into question. Global bond investors consequently are asking themselves whether US sovereign debt is really risk-free.

That loss of confidence particularly became visible during the days after April 2 – “Liberation Day” – when the US president unveiled punitive tariffs against practically the entire world based on a simple formula used to calculate them. The price of the US dollar dropped on the news, and US Treasury bonds also lost value while their yields inversely rose. Joint movements of that kind on the financial market had heretofore been known to occur only in emerging-market countries – when investors lose confidence in a country’s solvency, capital flees, its currency depreciates, and bond risk premiums rise. This phenomenon had never before been seen from the world’s only true reserve currency. So, the question of whether the US dollar risks losing that status is a perfectly understandable one.

Loss of confidence | Market movements like in an emerging economy

US dollar index and US Treasurys

Source: Bloomberg, Kaiser Partner Privatbank

That question, however, also is a little premature. No long-term shifts in power can be deduced yet solely from the developments of the last several weeks even though conjecturing grabs headlines and commentators love to engage in it. But neither America’s economic decline nor the US dollar’s loss of preeminence will happen overnight or even in the course of a few years. At present, there is no alternative whatsoever to the US dollar that would qualify for the role as the world’s reserve currency. The potential aspirants to that title all have certain deficiencies. The euro lacks political and fiscal unity, the renminbi is not freely convertible, and the number of Swiss francs in circulation is simply too small. Only the USA comes close to being an optimal currency area and has a capital market large enough to absorb global surplus savings. Moreover, the size of an economy, trade volume, and the financial market are not the only things that make for a world reserve currency. Naval supremacy (as well as air and cyber supremacy these days) and a strong network of partners have also been necessary conditions in the past. The underlying logic is that the country that presides over trade and investment routes around the world also has the dominant currency. Only the USA fulfills those two additional conditions in this day and age, even if both of those pillars by now have begun to teeter.

Ingredients for a world reserve currency | Economic and military might

Attributes of major currencies (and alternatives)*

Sources: Alpine Macro, Kaiser Partner Privatbank

*USD = US dollar, EUR = euro, CNY = Chinese renminbi, JPY = Japanese yen, GBP = British pound, CHF = Swiss franc, INR = Indian rupee, BTC = Bitcoin, SDR = IMF Special Drawing Right

So, the US dollar holds the exclusive privilege of acting as the world’s reserve currency today and for the time being. But that privilege comes with costs that are a thorn in the side of the new US administration. Maintaining the requisite military capabilities is cost-intensive, and the dollar’s characteristic tendency to appreciate during times of global economic weakness (and to hamper a recovery of the US economy during such phases) is also a burden. However, those factors are outweighed by benefits that will likely motivate even the Trump administration to uphold the status of the dollar. The dollar privilege allows the USA to borrow on very cheap terms, even and especially during times of crisis, and the preeminence of the dollar enables the US government to enforce sanctions and control information.

The greenback is unlikely to lose its status as the world’s reserve currency anytime soon. However, this in no way means that it definitely cannot exhibit cyclical weakness. That’s because the problem of waning confidence in the dollar is real. While it was easy for Trump to destroy trust, it is bound to be all the more difficult to restore it. And while it may take a reserve currency decades to lose prominence, capital flows (and currency prices) definitely can reverse course overnight. Managers of currency reserves at central banks and managers of other financial assets around the world have to ask themselves anew every day whether they want to continue holding US dollar assets (to the same extent as before) and what compensation to demand for the risk or what valuation they are willing to pay for US stocks. If they opt for a smaller weighting of US assets in new allocations, that alone would already be enough to weaken the US dollar. That kind of rebalancing of international investment portfolios would definitely be plausible and could follow the script of what transpired after the bursting of the tech bubble in the year 2000. In the years thereafter, the share of the MSCI World index accounted for by the USA fell from 60% to below 50%. It potentially has a much farther way to fall this time because the USA made up around three-quarters of the world index at the start of this year.

The evolution of currency prices indeed isn’t based solely on trust. Classic drivers of the currency market, such as economic growth, inflation, interest rates, and public finances, will continue in the future to co-determine the medium-term price of the US dollar. However, various valuation models, which indicate that the greenback is 15% to 30% overvalued, suggest that the currency potentially has a relatively long way to fall. So, a scenario of a downward drifting US dollar in the years ahead has a higher-than-average probability.

Overvalued | One more reason for a weak dollar

Valuation of US dollar

Sources: Bloomberg, Kaiser Partner Privatbank

Equities

Are US stocks in a new bear market?

Kaiser Partner Privatbank: Talk about a “bear market” always comes up among market observers and stock analysts when a correction on the equity market reaches double-digit percent territory. The Trump 2.0 correction in April is no exception here, precisely in part because the –20% threshold that commonly defines a bear market was nearly crossed seemingly instantly. In intraday trading, the S&P 500 index was down by as much as 19% from its all-time high hit in February – close, but no cigar.

A matter of definition | Almost a bear market

Drawdowns from all-time highs in S&P 500 index bear markets

Sources: Bloomberg, Kaiser Partner Privatbank

However, the investor community is unlikely to quickly let go of the bear-market question in the weeks ahead, especially not if the cause of this year’s slump in US stock prices – i.e. the Trump administration’s disruptive and unpredictable modus operandi – doesn’t get tempered down to an acceptable level for financial markets. Hopes of that happening have brightened again recently because the “Trump put” – i.e. the pain threshold that would prompt a lasting change in thinking in the White House – evidently really does lie after all at a level less low than had been feared. In any case, there recently have been more than just cosmetic corrections made to Trump’s new tariffs regime even if a genuine policy reversal hasn’t occurred yet.

One ray of hope for investors may be that the most drastic bear-market variant – a structural bear market like the one in Japan after 1989/1990 or the one resulting from the 2008 financial crisis – is very improbable because the requisite ingredients for that, such as extreme euphoria, widespread asset bubbles, high private-sector debt, or a banking crisis, are absent at the moment. However, it cannot be ruled out that (in the event of new share-price lows) an initially event-driven bear market could eventually turn into a longer-lasting cyclical bear market. Whether that actually happens particularly depends on the Trump administration’s policy impacts on economic activity and on the probability of a US recession occurring and its (adverse) consequences for American corporate earnings.

Cyclical bear market at the most | Painful enough

US bear markets and recoveries since 1950

Sources: Bloomberg, Goldman Sachs, Kaiser Partner Privatbank

How should investors position themselves today? The share-price advances in recent weeks may allow many of them to observe the situation a bit more cool-headedly now. In the face of ongoing uncertainty, two possible courses of action present themselves with regard to US stocks. On one hand, an investor can contemplate hedging US exposure on the futures market; corresponding options have become cheaper again lately. On the other hand, an investor should consider carrying out a general rebalancing of his or her equity portfolio in favor of other countries and regions (if he or she hasn’t already done that). The era of American exceptionalism really may be over. In any case, investors should review their respective asset allocations if they are predominantly invested passively via ETFs on capitalization-weighted world indices (e.g. MSCI World) because the weight of the USA, at a good 70% despite its underperformance this year, is still too high and poses a concentrated risk.