The Dollar Is Down: What Currency Volatility Means for U.S. Clients in Portugal
The U.S. dollar has declined more than 10% against the euro so far in 2025, reaching its weakest level in over three years. After a relatively stable period, this year has brought steep tariffs, renewed trade friction, and major European fiscal expansion, all contributing to sustained euro strength and dollar weakness.
For clients with dollar-denominated income, savings, or investments, this volatility is more than a headline. It directly impacts their purchasing power, compliance obligations, and long-term planning.
Why It Matters
A weaker dollar is creating immediate challenges that advisors should anticipate and address:
Rising Euro Costs: Day-to-day expenses, tuition, and healthcare in euros are consuming a larger share of dollar-based income streams.
Residency and Visa Requirements: Many Portuguese residency permits require minimum euro-denominated income or assets. A declining dollar can unintentionally jeopardize a client’s visa renewal eligibility.
Cross-Border Cash Flow and Tax Planning: Currency swings complicate forecasting for estimated taxes, planned distributions, and wealth transfer strategies.
Clients may not always connect currency fluctuations with these downstream effects, which makes proactive guidance especially valuable.
Strategies for Managing Currency Exposure
Hedging and Currency Management
Clients can explore several approaches to help mitigate currency risk:
Maintaining multi-currency accounts to hold euros alongside dollars.
Using forward contracts or structured deposits to lock in exchange rates for large transfers or recurring expenses.
Allocating a portion of liquid reserves to euro-denominated assets.
While hedging is not appropriate for every profile, discussing these options early can prevent reactive decisions later.
U.S. Tax Considerations Each strategy involves different compliance burdens:
Forward Contracts are generally treated as Section 988 foreign currency contracts. Gains or losses are ordinary income and must be reported when settled. Reporting is moderately complex but manageable with good records.
Structured Deposits combine interest-bearing deposits with embedded currency options. They often require special allocations between ordinary income and derivative components, resulting in high reporting complexity and potentially significant extra accounting fees.
Multi-Currency Accounts are simpler to administer but still require tracking any currency gains or losses when balances are converted, and filing FBAR and FATCA disclosures if aggregate foreign account balances exceed U.S. thresholds.
Evaluating the tax treatment and compliance costs in advance is essential to avoid surprises.
Creating Euro Income Streams
Some clients are considering generating euro-denominated income, but each path introduces complexity:
Portuguese Investment Funds: While these vehicles may produce euro returns, many are classified as Passive Foreign Investment Companies (PFICs), triggering punitive U.S. tax treatment and annual reporting obligations.
Operating a Portuguese Business: Active business operations can create euro income without PFIC exposure, but ownership may trigger Controlled Foreign Corporation (CFC) rules, leading to Subpart F inclusions or GILTI (Global Intangible Low-Taxed Income) even if profits remain abroad.
Euro-Denominated Cash Holdings: Larger balances are often subject to annual FBAR and FATCA disclosure requirements.
These structures can be effective but require careful coordination among tax, legal, and investment advisors to avoid unintended consequences.
Euro-Denominated Investments
For some clients, simpler instruments may be preferable to pooled funds or complex business structures. Euro-denominated bonds, whether issued by governments or reputable private companies, can offer predictable income and help match euro liabilities without necessarily triggering PFIC status. However, bonds come with their own risks, including credit risk, foreign withholding taxes, liquidity constraints, and potential difficulties enforcing creditor rights under local law.
Withholding Tax Consideration: For American clients who are Portuguese tax residents, interest on Portuguese bonds is generally subject to Portuguese domestic tax rules rather than treaty rates.
The Path Forward
Currency risk has become a defining consideration for cross-border planning in 2025. Advisors who help clients proactively address the dollar’s decline can add meaningful value, not only in managing costs but also in maintaining compliance and peace of mind. Whether clients choose euro-denominated bonds, active business investments, or hedging strategies, thoughtful planning and clear communication can help avoid costly surprises.
We will be discussing these risks, considerations, and strategies along with topics ranging from changes under the OBBB and Portuguese naturalization rules at our Midsummer U.S. Tax Update on July 21, live in Lisbon.
If you advise Americans in Portugal, we encourage you to join us and connect with peers navigating the same challenges.
This communication is for informational purposes only and does not constitute legal, tax, or investment advice. Areia Global is a U.S. based law firm providing U.S. federal tax advice and does not provide Portuguese legal or tax advice. Any references to Portuguese law are based on guidance received from local counsel. Individuals should consult with qualified advisors in each relevant jurisdiction before making any decisions regarding asset ownership or tax planning.