Pension funds with euro-denominated liabilities face a risk when they invest in other currencies: exchange rate fluctuations can work against them. Rather than treating this as an unpredictable risk, we can attempt to assess whether currencies are likely to appreciate or depreciate. In an in-depth analysis, APG’s Chief Economist Thijs Knaap examines various methods for valuing the US dollar and the most probable trajectory for the greenback over the coming years.
The risk associated with exchange rate fluctuations can be mitigated through currency hedging, although determining the optimal level of hedging is an empirical question. The new Dutch pension system calls for a fresh look at currency hedging. APG’s Expert Strategist Charles Kalshoven explores which hedge ratio is associated with the lowest volatility, both for individual asset classes and for the total portfolio.
Read Thijs Knaap’s analysis, “Dollar Forecasts”, and Charles Kalshoven’s exploration, “The Effects of FX".