Tariff turmoil drives UK firms to lengthen FX hedges in 2025

New research by MillTechFX indicates that finance leaders at corporates in the US and UK are adapting their foreign exchange (FX) hedging strategies in response to volatility driven by tariffs.

The MillTechFX Hedging Monitor surveyed 250 senior finance decision-makers at corporates across both markets in April 2025, shedding light on the actions taken by companies facing turbulent currency conditions related to tariff changes. Findings show that increasing hedge lengths and hedge ratios remain the most prevalent defensive strategies adopted, with 54% of respondents extending the period of their FX coverage and 43% upping the proportion of their exposure hedged.

Every business surveyed reported being impacted by tariff-driven market volatility, with 23% experiencing a negative effect. The impact has been uneven between regions, with 52% of US corporates suffering adverse effects, compared to 85% of UK firms reporting positive outcomes. The differing experiences are attributed to currency movements, particularly the fall in the US dollar's value against the pound, making imports from China and the US more affordable for UK companies.

Eric Huttman, Chief Executive Officer of MillTechFX, commented, "2025 got off to a frantic start with market uncertainty, driven by tariffs, creating volatility in the FX market and headaches for corporate CFOs in the first quarter.

"The pound began the year around $1.2500, dipped to a low of $1.2100 on January 13, and then rallied to a high of $1.3014 by mid-March, marking a 3.5% year-to-date gain by the end of Q1. ​The US dollar experienced its steepest early-year decline since 1989, with the Dollar Index (DXY) dropping 8.4% due to aggressive trade policies, economic contraction and investor concerns over potential US withdrawal from the IMF. Meanwhile, the euro rose sharply, gaining nearly 10% against the US dollar, driven by ECB rate cuts, strong eurozone exports, and a major German fiscal stimulus."

Huttman also noted that while corporate hedge ratios remained unchanged from the previous quarter at 52% overall and hedge lengths modestly extended from 6.5 months to 6.6 months, there was significant divergence between US and UK companies. "US corporates' hedge lengths and hedge ratios are the lowest since we started tracking them a year ago, which means they're protecting less of their exposure and for shorter periods, perhaps to build flexibility into their hedging programmes. Meanwhile, UK corporates' hedge lengths are the longest they have been since last year, suggesting they're locking in rates for longer, possibly because they're more favourable for the pound due to the weaker dollar."

Data in the report shows UK hedge lengths now average 6.57 months, the highest point in the past year, as businesses seek to secure exchange rates they regard as favourable. In contrast, US hedge lengths have declined to 5.84 months and hedge ratios to 39%, both at their lowest levels since the company began tracking them, indicating an attempt by US firms to build in more flexibility within their hedging strategies.

According to the survey, volatility was identified by 24% of respondents as the most significant external factor influencing FX hedging decisions in the first quarter of 2025. Huttman explained, "This tariff-driven volatility created challenges for corporates and many doubled down on hedging to protect their bottom lines. Over half (54%) extended their hedge lengths while over two-fifths (43%) increased their hedge ratio as a direct result. Both are defensive manoeuvres designed to lock in more certainty for longer. Surprisingly, geopolitics was the second smallest external factor affecting corporates' FX hedging in Q1."

The findings suggest that, while all respondents said their business had been impacted by tariff-driven volatility, the effect was significantly worse for US firms: "US firms suffered the most, with 52% enduring a negative impact. Interestingly, 85% of UK corporates were positively impacted by tariff-driven volatility, likely down to the fact that Trump's policies/tariffs have caused the dollar's value to fall against the pound, making it cheaper for corporates to import from China and the US, two of the UK's largest trading partners," Huttman said.

He added, "Looking ahead, we can expect more hedging activity as tariffs continue to bite. In recent weeks, several of our clients pushed their hedges out to the maximum available tenor as they looked to lock in protection and ride out near-term instability. This makes sense, given that extending hedges maintains the same level of protection against currency movements but without the need to book in profit and loss generated by short-term FX swings. Those without hedging programmes will likely have suffered from recent volatility and should consider implementing a risk management programme to protect their bottom line, but they need to ensure they don't lock in rates at the wrong time and suffer more losses."

The research, which focused on corporates with a market cap of $50 million up to $1 billion, was conducted with finance leaders in both regions, providing a snapshot of current FX risk management practices and the degree to which external economic factors are currently shaping corporate policy on hedging.