Foreign exchange (FX) risk has been gradually increasing and is now at an inflection point. Rising interest rates in the UK and United States since the start of 2022, geopolitical tensions, and shifting trade policies driven by new U.S. tariffs have all combined to cause bouts of significant currency volatility.
The U.S. dollar, for example, has swung wildly since late 2024, with the U.S. dollar index (DXY) peaking in early 2025 at its highest level in two years, before recording its worst first half since 1973. Then, despite falling in early 2026 to its lowest point in four years, the dollar has recovered somewhat as the conflict in the Middle East has led investors to return to safe havens.
The financial impact on businesses is significant. In 2025, UK companies reported average losses of £6.7 million as a result of these currency swings, while U.S. businesses reported average losses of $9.9 million due to unhedged FX exposures. These results demonstrate why FX risk has become a core financial concern for organizations on both sides of the Atlantic—and why an increasing proportion of businesses globally are hedging FX, rising from 81 percent in 2024 to 88 percent last year.
In this environment, standing still is no longer an option. Companies need to evolve their legacy hedging strategies and shift from reactive protection to more dynamic, forward-looking risk management.
Locking in Protection
According to the MillTech Corporate Hedging Monitor Q4 2025, which drew on survey responses of 250 senior finance decision-makers at UK and U.S. corporates, the average hedge ratio was 49 percent in Q4/2025, while the average hedge tenor was 6.3 months. These were higher and longer than the previous quarter, when hedge ratios (46%) and lengths (5.8 months) were the lowest on record, but they were still modest relative to earlier periods. This indicates that most businesses were looking for partial protection to balance downside risk reduction with the flexibility to benefit from favorable currency movements.
Going into 2026, 64 percent of firms planned to increase their hedge ratios and 59 percent planned to increase their hedge lengths in light of tariff-driven market uncertainty and volatility, emphasizing a willingness to lock in more protection, for longer, to improve cash flow certainty.
This trend was more pronounced in the UK, where corporates were more risk averse, with higher average hedge ratios (50%) and longer hedge tenors (6.5 months) than their American counterparts. UK firms were also more likely to want to increase their hedge ratios and lengths. One possible reason is that UK companies are more likely to be exposed to global currency swings than are U.S. businesses. The FTSE 100, for example, generates around three-quarters of its revenue from abroad, while this figure is only around 30 percent for the S&P 500.
What's Driving Changes in Strategy?
When asked about the biggest external factors influencing their FX hedging decisions in Q4/2025, UK corporates were most likely to say volatility. In the UK, the pound sterling fluctuated from a four-year high against the dollar in June 2025 to its worst monthly performance in three years just a month later. The Deutsche Bank CVIX volatility index also saw currency volatility reach levels in 2025 that we had not seen since 2022. These sharp swings made it harder for corporates to predict currency moves and time their hedges, encouraging a shift toward longer hedge tenors and larger hedge ratios.
In the United States, the Federal Reserve held off on interest rate cuts until September 2025, but then made three cuts near the end of the year. In the MillTech research, U.S. companies named central bank policy as the main driver behind their FX hedging decisions. Policymakers continue to suggest that interest rates might fall more, but also might rise later this year, reinforcing the case for consistent, longer-term hedging.
Inflation is another factor driving some businesses' hedging decisions, according to the MillTech survey respondents. Even though inflation was falling in both the UK and U.S. by the end of 2025, price uncertainty continues to influence central bank decisions, and this interconnected risk environment increases the value of locking in cost certainty. Now concerns around inflation have been amplified by the closure of the Strait of Hormuz.
A Shift Toward Greater FX Protection
The combination of increased volatility, reduced visibility on policy direction, and the re-emergence of inflation risk is making it more difficult for global companies to plan ahead. Our research early this year revealed that these dynamics are pushing corporates toward a more disciplined—and defensive—approach to FX risk for 2026.
With uncertainty likely to remain elevated, the key challenge for businesses will be balancing how much risk to hedge, and for how long, to ensure their level of protection is aligned with their differing levels of risk tolerance and exposure to global markets.
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