Evaluating Currency Management Strategies for Portfolios

In the realm of international investing, currency management poses significant challenges and opportunities for portfolio managers. A global investment firm is currently holding a diversified portfolio consisting of assets in multiple currencies, including but not limited to, the Euro (EUR), Japanese Yen (JPY), and British Pound (GBP).

With the current increase in volatility among these currencies due to geopolitical events and changes in monetary policy, the firm is evaluating several currency management strategies to mitigate currency risk while optimizing portfolio returns.

The portfolio manager has narrowed it down to three potential strategies:

1. A dynamic hedging approach that adjusts hedge ratios based on market conditions and forecasts.

2. A static hedging approach that employs fixed hedge ratios regardless of market fluctuations.

3. A target volatility strategy that allows the portfolio's currency exposure to fluctuate within a predefined range based on historical volatility measures.

Given these options, which currency management strategy is most likely to optimize the risk-return profile of the portfolio while effectively managing currency exposure?