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Currency hedging for UAE Investors: Why hedged and unhedged returns differ 

October 26, 2026

For UAE investors, the dirham’s long standing peg to the US dollar creates a relatively stable currency environment. One US dollar is worth 3.67 dirhams, meaning UAE investors generally face limited exchange rate fluctuations when converting between AED and USD. 

However, this stability does not extend to every international investment. A UAE investor holding European shares, Japanese bonds or Australian assets may experience changes in portfolio value based on currency movements, even when the actual underlying investments perform well. 

With global interest rates and currency markets continuing to evolve in 2026, this distinction is becoming ever so relevant for UAE investors seeking international diversification. 

What is currency hedging 

Currency hedging is a strategy used to reduce the impact of exchange rate movements on international investments. 

When UAE investors purchase overseas assets, their returns generally depend on two components: 

  1. Asset performance 
  2. Currency movements 

An unhedged investment is exposed to both. 

A currency hedged investment aims to reduce the impact of exchange rate fluctuations on investment returns. This is commonly achieved through a foreign exchange forward contract, which obligates two parties to exchange a specified amount of currency at an agreed rate on a future date. This provides greater certainty about future exchange rates, although it also means giving up potential gains from any favourable currency movements. 

For example, consider a UAE investor who purchases €10,000 worth of European shares when €1 = USD 1. Because the UAE dirham is pegged to the US dollar, the investment is initially worth approximately AED 36,725. 

Now suppose the shares remain unchanged in value, but the euro weakens to €1 = USD 0.90. Without hedging, the investment would now only be worth USD 9,000, or AED 33,053, resulting in a 10% currency related loss. 

To protect against this, the investor could enter a forward contract agreeing to sell €10,000 for USD 10,000 on a specific date. If the euro falls to USD 0.90, the contract protects the

investor from the currency’s fall in value. Instead of receiving only USD 9,000 at the exchange rate, the investor receives USD 10,000 at the previously agreed rate, preventing a USD 1,000 currency related loss. 

However if the euro strengthens to USD 1.10, the investor remains obligated to exchange €10,000 for USD 10,000, giving up the additional USD 1,000 they could have received at the market rate. 

Alternatively, investors can purchase currency options, which provide the right, but not the obligation, to exchange currencies at a predetermined rate. Unlike forwards, options allow investors to benefit from favourable currency movements while retaining protection against unfavourable movements, generally in exchange for an upfront premium. 

Ultimately, currency hedging manages exchange rate risk rather than underlying risk. Hedging also involves costs and other adjustments, meaning it does not guarantee higher investment returns. 

Why Currency Hedging Matters for UAE Investors 

US Interest Rates Influence the UAE Investment Environment 

Because the AED is pegged to the USD, US monetary policy has significant implications for the UAE’s financial environment. 

In September 2026, the US Federal Reserve raised its target interest rate range to 3.75% – 4.00%. Higher US interest rates can make newly issued USD-denominated investments, such as government bonds, more attractive by offering higher yields. 

Interest rates also influence currency hedging. When banks set forward exchange rates, they account for differences in interest rates between the two currencies. For example, if US interest rates rise while European interest rates remain unchanged, a UAE investor agreeing to sell euros for dollars in the future may receive a more favourable forward exchange rate. 

For UAE investors considering European, British, Japanese or Australian investments, these interest-rate differences can affect the financial benefits or costs of hedging foreign-currency exposure. 

International Diversification Introduces Currency Exposure 

UAE investors seeking opportunities beyond domestic markets may consider international equities, fixed income, property and investment funds.

While international diversification can reduce concentration in a single economy, it can also introduce currency exposure, which can affect portfolio performance independently of the underlying investments. 

A strong or weak US Dollar changes overseas returns 

Because the AED follows the USD, when the USD strengthens against a currency, the AED value of investments in that currency declines. When the USD weakens, the opposite occurs. 

This makes currency movements an important consideration when evaluating international fund returns. A strong reported return may partly reflect favourable exchange rate movements rather than better underlying asset performance. 

Choosing hedged or unhedged investments

Currency hedging may be appropriate for investors who: 

  • Want greater predictability in AED-denominated portfolio returns 
  • Have future expenses or liabilities denominated in AED or USD 
  • Hold international fixed-income investments where currency movements could significantly affect returns 
  • Prefer to evaluate overseas investment performance with reduced currency interference 
  • Unhedged investments may be appropriate for investors who: 
  • Expect future spending in foreign currencies 
  • Have longer investment horizons and can tolerate fluctuations in reported AED return 

Conclusion 

Before investing internationally, UAE investors should consider not only where their money is being invested, but also what currencies they are being exposed to. Investors should also consider how their investment strategy aligns with their financial goals and time horizon and make informed decisions about currency exposure. 

Disclaimer 

Vitti Capital Pty Ltd (ABN 13 670 030 145) is a Corporate Authorised Representative (001306367) of Point Capital Group Pty Ltd (ABN 41 625 931 900), the holder of Australian Financial Services Licence number 518031. This communication contains general information only and does not take into account your objectives, financial situation, or needs.

Before acting on any information, you should consider whether it is appropriate to your circumstances. We recommend you seek personal financial advice before making any investment decision. 

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