Millions in unhedged losses to drive return to protection in 2026

The US dollar’s decline continued through Q4 2025 following two Federal Reserve rate cuts, with the dollar index (DXY) falling to 98.66. By year-end, the DXY was more than 9% lower than at the start of 2025, weighed down by tariff uncertainty and waning confidence in economic policy.

Sterling’s performance remained mixed over the quarter, with volatility remaining high. Despite falling in the run-up to the Autumn Budget, with GBP/USD hitting a seven-month low and GBP/EUR the weakest in two and a half years, it rebounded to a one-month high following the OBR’s forecast establishing £22bn in fiscal headroom.

The most striking finding from Q4 was the scale of losses incurred by corporates with unhedged FX exposure. Four in five firms (80%) reported losses over the period, with nearly a fifth (19%) describing these as significant. Average losses reached £6.71m in the UK and $9.85m in the US, with some losses exceeding $25m. If applied more broadly across the corporate sector, these figures point to substantial losses from unmanaged FX risk, underscoring the financial impact of remaining unhedged during periods of heightened volatility.

Against this backdrop of heightened economic and fiscal uncertainty, corporate hedging activity rebounded from Q3 lows, signalling a renewed focus on risk reduction. The average hedge ratio rose from 46% to 49%, although it remains below levels seen before Q3 2025.

Hedge tenors also lengthened, increasing from an average of 5.8 to 6.3 months, in line with levels recorded in the first half of 2025. In the UK, average hedge lengths marginally exceeded those of Q4 2024, highlighting a renewed willingness among corporates to lock in protection for longer and improve cash flow certainty.

Central bank policy and inflation rates emerged as the most influential external factors shaping FX hedging decisions, each cited by 17% of corporates. Notably, this was the first time inflation rates ranked joint top, while central bank policy has consistently led the list since Q2 2025.

Inflation concerns were most pronounced in the UK, where 19% of respondents cited it as the key factor, although volatility was the single largest factor for UK firms (22%). This contrasted with the US, where central bank policy (20%) and credit availability (17%) remained the dominant considerations. Credit availability, which was the UK’s most significant factor in Q3, fell to the second lowest in Q4.

Looking ahead, tariff-driven market uncertainty is prompting a more defensive outlook. Nearly two-thirds of corporates plan to increase hedge ratios (64%) and extend hedge tenors (59%), with UK firms more inclined to do so than their US counterparts. Only a small minority expect to reduce coverage, with 10% planning to lower hedge ratios and 9% hedge lengths.

Overall, Q4 2025 marked a clear shift back towards defensive FX management. While hedge ratios and tenors increased, they have not yet returned to early-2025 levels, suggesting firms continue to balance protection against cost and flexibility. However, with most corporates experiencing losses from unhedged exposure, 2026 is likely to see further increases in coverage as tariff and policy-driven uncertainty persists and major currencies recorded their largest swings in nearly a year.