Currency Management in Asset Allocation

As a portfolio manager overseeing an internationally diversified fund, you are tasked with addressing currency risk as part of your asset allocation strategy. Your fund holds assets in three currencies: the U.S. Dollar (USD), Euro (EUR), and Japanese Yen (JPY). The EUR has recently experienced volatility due to economic uncertainties in the Eurozone, while the JPY is affected by monetary policy shifts in Japan.

You are considering adjusting your currency exposure to manage the risk and align with your investment outlook. Specifically, you can either hedge your EUR exposure, increase your exposure to JPY by purchasing Japanese assets, or maintain your current allocation. Each decision will impact your portfolio’s overall return and risk profile.

Given this scenario, which option represents the most effective currency management strategy in terms of mitigating potential losses from currency fluctuations?