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All your business needs to know about managing currency risk in 2025.
Last updated: 21 August 2025
UK small and medium-sized businesses (SMEs) can deploy a number of strategies to manage FX risk in 2025. Currency risk management usually centres around a handful of common derivatives products, such as forward contracts and spot transactions. These services allow businesses to benefit from advantageous exchange rates and can partially protect them from adverse movements.
While they might work in a stop-gap capacity, the simplest FX risk management tools are no substitute for a comprehensive strategy. Relying on spot and forward contracts can leave SMEs vulnerable to market volatility, something we’ve seen frequently in 2025.
The problem is that CEOs, CFOs and other decision-making professionals often treat FX risk as a peripheral concern. That’s understandable given the sheer volume of fires they have to put out on a daily basis. But with the pound moving by up to 15% against its rivals in the span of just a few months, it is imperative that British businesses understand the significant risks to their bottom line.
This guide provides all the information you need to know about managing currency risk in 2025.
Table of contents
- What is currency risk
- Why do exchange rates change
- How does currency risk affect businesses
- Why is 2025 different
- Top tips for managing FX risk
- FAQs
What is currency risk?
Currency risk refers to the potential losses a business faces when making or receiving an overseas payment. Markets move every minute of the day. This means you’ll get a different price in the morning compared to the evening, or evening across a 10-minute time span. The lottery of currency markets could therefore mean you stand to lose more or less simply by making a trade slightly too late or too early. Many currency transfers are small. Yet if the transactions are large enough, that variance can amount to millions on the balance sheet.
There are three main types of currency risk: translation, transaction, and economic. You’ll find a broad overview of these terms below.
Translation risk encompasses a company’s subsidiaries whose assets might become less valuable if their native currency declines. This is probably the least relevant for SMEs, given their exposure to subsidiaries is likely to be small.
Transaction risk is a more common concern. Importers and exporters that agree contracts to purchase and sell goods need time to fulfil their obligations. Because of this, payments are often made weeks or even months after the initial price is agreed. If that price is denominated in a foreign currency, there is a risk that the final price has shifted by the time payment comes due.
Economic risk essentially refers to the factors that cause exchange rates to move. As we’ll see later, there are many things that influence FX markets – from interest rates and inflation to growth and sector output.
GBP to USD in the past 12 months. The chart below shows the extent of the volatility in 2025 so far.
Why do exchange rates change?
While there are many nuances, the most common causes of currency volatility are economic, fiscal, and geopolitical. The constant barrage of news that comes across the ticker means that exchange rates and constantly re-appraised and scrutinised. As one of the more excitable markets, currency trends can change and the drop of the hat and follow broader changes in risk appetite, economic performance, as well as political developments like elections and government spending plans.
In an economy increasingly driven by fiscal policy, interest rates are a huge factor in deciding relative value pricing. Over the past year, the euro has come under pressure due to the lower interest rates set by the European Central Bank. This would be fine in isolation, but the problem comes when investors compare those rates to the Bank of England, for example.
Keep in mind that FX is a notoriously opportunistic market. Investors around the world often scour pricings looking for an opportunity to make easy money. Institutional investors, who often represent trillions of pounds in combined financial interests, have more than enough clout to move pricing. For that reason, exchange rates can sometimes fluctuate out of session (i.e. when other investors are tucked up in bed) and may seem irrational at first glance.
In truth, currency markets and exchange rates can be baffling. For more in-depth analysis of market trends, and to see why it’s so hard to trust even expert opinions, download our latest Quarterly Currency Forecast.
How does currency risk affect businesses?
Even small swings in the value of one currency against another can have a sizeable impact on SMEs. As with many things in business, this is primarily a question of scale. 1% is a paltry figure, but if your margin shifts by 1% on a key £2 million pound transaction,
For example, let’s say the pound weakens by 3% against the US dollar in the three months after a manufacturing company agrees to pay an American supplier. Assuming the exchange rate has weakened from 1.34 to 1.29, that’s a difference of £100,000 you’d be on the hook for. Could your business afford to pay the difference when it came down to it?
Our risk management calculator helps you visualise this risk for yourself. Feel free to play around with the widget. Just input your budget along with the exchange rate and it will show you the extent of your currency risk on any transaction.
Why is 2025 different?
If you’ve been keeping an eye on the news this year, you might have an idea of why things are different this year. In short, the world has become increasingly unstable – both in terms of geopolitics and economics.
Ongoing wars in Ukraine and the Middle East have been continued sources of stress for FX markets. This has been the result not just of the uncertainty they bring to the table, but also due to new government spending commitments in Europe. Germany and the United Kingdom are just two nations to announce they will be beefing up spending, with far-reaching implications for the pound and the euro.
Meanwhile, US President Donald Trump has pursued an aggressive series of global tariffs. These policies have wreaked havoc on the usual interplay of exports and imports and turned the global financial order on its head. The price of this ploy has been a dramatically weaker US dollar, which now faces significant reputational challenges as investors scramble to find other safe-haven assets.
These developments mean FX risk is more prominent than ever in 2025. Put simply, SMEs and UK corporates must get serious about managing their FX risk before it eats any further into their margins.
Top tips for managing FX risk
Here are five top tips that can help your business manage its currency risk.
- Don’t underestimate the risk
The first step to managing FX risk effectively is to acknowledge its potential to affect your objectives. Countless SMEs have gone under due to currency-related exposures. Cash will always be king for small businesses, so don’t let routine fluctuations in currency markets put your cashflow at risk.
- Understand why markets move
By now, you should have a reasonably sound understanding of why currency markets move. This is essential when it comes to modelling risk and being able to anticipate pinch points and risks down the line. Keep building on your knowledge and stay up to date with the latest news. Our forecasts are a great tool for doing this.
- Look at the bigger picture
Don’t think of currency as an insignificance. Sound risk management will only come when you treat FX as an important part of your treasury management arsenal.
- Think strategically
Similarly, the best FX policies dovetail with your wider business strategy to deliver on your KPIs and objectives. Plotting a route through currency volatility requires clarity, but the rewards can be substantial for businesses that achieve it.
- Review, monitor, and improve
Over time, market dynamics might change, or your business objectives could shift. No FX risk management policy needs to be set in stone. In fact, the opposite is much better. Review your policy regularly, monitor areas that need to change, and constantly improve on the protections you have in place.
FAQs
How do I know if my business has currency risk?
Do you operate internationally, or do you have suppliers or customers with billings in foreign currencies? If you answered yes, then unfortunately you are exposed to currency volatility. The good news is that you have many options to mitigate the risk that comes along with this.
What can I do to manage FX risk?
Currency risk can be managed in a number of ways. The five top tips listed above are a great jumping off point, but it’s essential that you approach FX risk seriously. To help implement bespoke, comprehensive solutions, speak to a member of our team today.
Can’t I just wait for the rate to improve?
Perhaps, but it’s a big risk. There’s really no way to guarantee that a rate will improve, whether from a position of strength or a position of weakness. Plus, these movements rarely conform to your timescale. If you need to pay a supplier next week but are waiting for the rate to improve, you will be stuck in a bind.
What tools are available to manage currency risk?
Along with forward contracts and spot transactions, British SMEs use a complex array of solutions to manage currency risk. Options and market orders provide a more sophisticated toolkit and can create diverse protections that shield you during periods of volatility.
How can I get started?
Register with Smart Currency Business today or request a call back from our team.
