The world has entered one of the most geopolitically volatile periods in recent memory, bringing new levels of stress and uncertainty down on global economies. In this article, Eric Huttman, CEO of MillTech, explores how UK corporates are changing their FX hedging strategies to navigate an increasingly challenging geopolitical and economic landscape.
2025 is gearing up to be the most economically uncertain period in the last decade. With various conflict zones still raging, inflation remaining relatively high, and Trump imposing tariffs on key trading partners, the geopolitical stage is set to bring more currency volatility, and businesses are adapting their FX hedging strategies to keep pace.
Trump’s freshly imposed policies have hit the dollar hard, with the ICE index falling to a three-year low in April off the back of tariffs and foreign policy changes. This is something that the President has historically favoured openly, given that a weaker dollar tends to facilitate international trade by increasing other countries’ buying power. However, in the long run, levying tariffs could have the opposite effect as they’re likely to damage trading partners’ economies, weakening their currencies in turn and making business with the US more costly.
As tariffs make trade more expensive to begin with, this effect could compound, sending major global currencies spiralling and driving up currency volatility. Indeed, the ECB is increasingly having to consider euro parity with the dollar.
With so much volatility on the horizon, it’s no surprise that UK businesses are increasing FX hedging from already high levels – up to 76% of corporates in 2024 from 75% the previous year. But how are they adapting their FX strategies to cope with rising uncertainty?
Bolstering FX hedge lengths
One critical way that we’re witnessing UK corporates shift their FX strategies in response to higher levels of uncertainty and volatility is by increasing their FX hedging lengths. By the end of 2024, hedging lengths had increased by a significant 47% to 5.55 months, up from only 3.78 months in 2023.
In addition, over half of UK corporates (53%) plan on extending their FX hedging durations in direct response to growing geopolitical concerns. By increasing the hedging lengths, corporates can lock in more favourable exchange rates for longer periods of time, protecting them from any volatile future price hikes.
The stability that extending hedge lengths provides can also help businesses set budgets without having to worry about sudden currency fluctuations impacting their expenses or profits. They can also better manage their cash flows without needing to set aside extra reserves to cover potential currency losses.
Uptick in options buying
64% of UK corporates are now also using FX options more frequently. Options can also be a very effective tool for managing currency volatility, given the flexibility they can provide for businesses.
Unlike increasing hedging lengths, which locks in exchange rates for an extended period of time, buying FX options gives companies the ability to exchange currency at a predetermined rate. This enables corporates to protect themselves from unfavourable currency movements while retaining the option of trading at a better rate should the market move in their favour. In this way, corporates earn themselves downside protection and upside potential.
In this way, companies that are looking to prepare for currency volatility, but can’t predict when or how much the market will move, gain the ability to make decisions as events unfold, rather than freezing rates prematurely.
The drive for automation
Keeping pace with rising volatility requires a great deal of flexibility and speed to be able to react to rapidly changing prices. Despite this, manual processes are still heavily prevalent among UK corporates. 34% of respondents still conduct financial transactions via phone, with 32% and 30% respectively still doing so via email and sending files.
This is a huge burden on corporates’ efficiency, and holds them back during periods of intense volatility. For this reason, it’s easy to see why corporates’ top priority was automating manual processes as we head into an era of heightened uncertainty. Artificial intelligence was also at the top of corporate finance leaders’ priorities, with 100% of those polled exploring AI in some form.
Shifting priorities
Naturally, corporates’ FX strategies are evolving to keep up with the changing geopolitical landscape. With unhedged risk often left heavily exposed during times of higher economic uncertainty, companies must adapt or risk being left behind by the market.
Locking in favourable exchange rates for longer and increasing their FX flexibility are effective methods for navigating more turbulent markets. Combining these two tactics can form a functional strategy, extending hedge lengths for core cashflows and options to cover more uncertain and speculative exposure.
As the market braces for further upsets in 2025, harnessing the power of automation is also essential for corporates operating in a volatile currency market, ensuring that FX transactions can be operated at speed in reaction to protect exposure from swings and dips in major world currencies.
