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Why FX Uncertainty Is on the Rise

After Covid wreaked havoc on the global economy, U.S. businesses (on the whole) experienced a few years of dramatic recovery. Still, many U.S. treasury teams entered 2025 managing higher debt loads, concerns about future demand, and uncertainty around interest rates.

Tariffs have become a tool the U.S. government uses in pursuit of diplomatic goals and for getting concessions from countries that are not entirely aligned with American interests. One recent example was the threat of additional tariffs on European countries that objected to the United States’ attempts to acquire Greenland. The threat was subsequently rolled back, but it was revealing. The Trump administration’s approach to using tariffs for diplomatic leverage means other countries now have idiosyncratic relationships with the United States, and foreign companies are experiencing new costs of doing business with America.

U.S. businesses face country‑by‑country tariff schedules that can change on relatively short notice, complicating long‑term planning around issues such as sourcing, the currency used in invoicing, and FX hedging horizons. Just one of myriad examples is the tense back-and-forth that has been playing out between the U.S. and the world’s most populous economy.

India found itself at odds with the White House because of its business ties with Russian oil producers. Back in August, the Trump administration hit India with a 50 percent tariff on almost all goods. Ever since, the nations have been working on a deal to reduce that rate, and just this week announced an agreement through which the U.S. will reduce tariffs on Indian goods to 18 percent in exchange for an elimination of all tariffs on Indian imports from America, a transition by India to Venezuelan oil, and other concessions.

Such rapid swings in tariff policy may force corporate treasurers, on very short notice, to adjust FX hedging programs, liquidity buffers, and counterparty limits. Even though vendors in a particular country may once have been attractive trading partners, doing business with them may no longer be desirable in the current environment. Thin profit margins, across industries and around the world, mean that small changes to variables out of a company’s control—such as political decisions that impact a nation’s ease of commerce—become an unforeseen obstacle to doing business there.

Meanwhile, the ever-evolving dynamics of international relations mean today’s disagreements and feuds may disappear by tomorrow. Keeping forward calculations short-term helps in countering trauma that might not last long.

Further complicating the treasury horizon this year, the U.S. Supreme Court is currently weighing the legality of the executive branch’s unilateral imposition of tariffs. If it rules that the U.S. has acted in error, large swaths of the United States’ tariff regime may be eliminated all at once. Corporate treasurers should now be preparing contingency plans for their organization’s response to sudden changes in tariff rates, contract terms, and supply‑chain locations.

The Future Looks Murky

When the U.S. imposed huge new tariffs on the world’s second-largest economy, China responded forcefully. The backlash affected everything from American soy exports to U.S. businesses’ access to rare-earth metals, a key component in high-end semiconductors and microchips. The two superpowers have since reached a trade truce, gradually eliminating many of the tariffs they levied on each other, but clarity is lacking on how the governments will move forward in years ahead.

For companies with yuan‑linked exposures, this uncertainty has increased the importance of stress‑testing USD-CNY scenarios in which trade volumes, tariffs, and FX rates all move together rather than in isolation. Corporate leaders will be looking to treasury in the near future as they make decisions on where to locate production, where to book revenues, and which currencies to use for invoicing.

The FX challenges are certainly not limited to China. 2025 saw wild and unprecedented volatility in currency markets. The first six months of the year marked the worst half-year run for the overall value of the U.S. dollar since 1973, when the DXY index was first invented to track the USD against a basket of other currencies. The dollar still hasn’t recovered most of those losses. For corporate treasurers, the issues with the dollar have translated into significant swings in the value of foreign revenue and costs when reported in USD, especially for companies with unhedged or partially hedged positions.

Atypical currency behavior in response to last year’s interest rate cuts have further exacerbated the challenge for corporate treasurers. Typically, U.S. interest rate cuts weaken the dollar, as USD-denominated assets become less attractive to foreign investors, but our current cycle of expansionary monetary policy has not resulted in continued deterioration for the buck. In fact, once the Fed began its loosening cycle, the USD jumped by 1.2 percent between September 17 and December 31, 2025, according to the Bloomberg Dollar Spot Index.

This kind of counterintuitive movement underscores that treasurers should not base their FX hedging decisions on expectations around possible upcoming Fed rate cuts.

Gross domestic product (GDP) figures are a big factor preventing the dollar from dropping further relative to its peers. Although some economists were concerned about a contraction after Q1/2025 numbers came out, the second quarter’s 3.8 percent annualized GDP growth helped stabilize the USD. As Europe battled national budget crises and Japan battles persistent inflation, the U.S. economy continues to compare favorably with other major regions, which helps support the dollar and tamps down hedging costs for U.S. companies.

That may soon change. Attacks on the independence and autonomy of the Federal Reserve are leading many outside market participants to interpret the president’s comments and attempts to remove Fed governors as a threat to the nation’s economic stability. Since the financial world works on a USD-based system, global market participants place their absolute faith in the world’s most influential central bank, the Fed. Recent actions by the U.S. government are leading some to question their blind trust in the government’s statistics which underlie the Fed’s analyses, conclusions, and policy decisions.

Going forward, policymakers will also need to confront the phenomenon of ongoing “stagflation,” low levels of economic growth accompanied by stubborn price increases. In December, the Federal Open Market Committee (FOMC) voted to lower the Fed’s benchmark interest rate by another quarter point, but their median projections indicated they expect only one rate cut this year and one next year, as they balance inflation with jobs growth. Chairman Jerome Powell suggested that the Fed has done enough to bolster the economy and that he’s aiming for inflation to continue falling toward 2 percent after tariff impacts have settled.

FX moves in recent weeks have been mostly quiet, and no clear direction can be assigned to the dollar. It is worth paying attention to the positive trend in emerging-market and Latin American currencies, which have improved as a result of adjustments in the costs of commercial trading, in anticipation of market-friendly reforms in some countries, as well as the growing importance of raw materials and energy.

Per the MSCI Emerging Markets Currency Index, a cohort of emerging-market currencies appreciated by 33.57 percent last year. This prompted many companies to revisit their assumptions about which currencies are “structurally weak” and whether their hedging policies for emerging-market exposures are still fit for purpose. In many treasury organizations, this analysis has led to more dynamic hedge ratios and closer coordination with procurement and commercial teams.

How Treasury Teams Are Coping

Many corporates are seeing growing pressure from overseas vendors to be paid in local currencies. The need to do business in unfamiliar currencies has increased some treasury teams’ use of spot and non‑deliverable forward (NDF) contracts in currencies that are not commonly exchanged, such as the Vietnamese dong and Kenyan shilling. At the same time, this trend has led U.S. companies to expand their hedging in Indian rupees, Colombian pesos, and Philippine pesos.

These shifts require treasury teams to reassess counterparty limits, liquidity availability, and internal expertise when operating in less‑liquid currency markets. But many companies that don’t do business in emerging-market currencies share the same dilemma: They struggle to plan further than six months out when the currency landscape is changing so dramatically from month to month.

In response, many treasury teams are shortening hedge tenors to maintain some flexibility as conditions continue to change. Depending on the currency pair, forward hedging can be costly, flat, or beneficial. Instead of going far out, like a year, into purchases, best practice involves setting funds aside and using them without taking forward points into the cost, while also looking at the forward ladder monthly instead of only periodically throughout the year.

Today, businesses that want to protect themselves from market moves are using holding accounts to preserve some funds for the short term. They are also increasing their use of short‑term forward contracts to handle the possibility of policy reversals. Then, when the White House changes its mind, they are taking back their forward contracts and starting new ones—with rates that are usually in their favor, after a 2025 marked by dollar declines for many pairs, particularly among the emerging-market currencies.

Meanwhile, treasury teams willing to play into the risk a little bit and participate in gains and losses from FX shifts are booking options and other securities. These structures are more complicated than straight forward contracts with simple margin deposits and margin calls, but they can add to treasury managers’ arsenal in engaging with the flows of FX. They also offer some additional benefits that are not available in spot or forward contract transactions.

Exercising options requires a solid assessment of the outlook for the currency and its typical level of trading volatility. As an example, USD-MXN crosses represent more volatility, due to higher interest rate differentials and vulnerable elements of the Mexican economy, than do vanilla options with USD-CHF, since the Swiss Franc is a staple safe-haven asset backed by one of the world’s most respected banking systems.

No matter the currency, treasury teams engaging in FX hedging need to understand their break-even price and have an exit strategy in case things go awry.

It’s true that forecasting FX right now seems like more of a fool’s errand than in the past, but the key is to align a hedging program’s choice of instruments with the company’s risk appetite, accounting objectives, and liquidity constraints, rather than chasing short‑term FX views. For now, the balance of tariffs, relative U.S. economic growth, and Fed monetary policy suggests scope for further dollar weakness, but likely at a slower and more uneven pace than in 2025—making disciplined, policy‑driven FX risk management more important than directional bets.