Currency Risk in Investing: How FX Movements Affect Your Returns
Understand how currency fluctuations impact international investment returns and learn strategies to manage foreign exchange risk in your portfolio.
What is currency risk?
When you invest in assets denominated in a foreign currency, your returns depend on two things: the performance of the investment itself and the change in the exchange rate. If a European stock rises 10% in euros but the euro falls 8% against the dollar, your dollar-denominated return is only about 2%. Currency risk -- also called exchange rate risk or FX risk -- is this additional layer of uncertainty.
Strategies for managing currency risk
- Diversify across multiple currencies so that gains and losses in different exchange rates partially offset each other.
- Use currency-hedged ETFs that employ forward contracts to neutralize FX movements.
- Focus on companies with natural hedges -- international firms that earn revenue in many currencies.
- Accept currency exposure as a long-term diversification benefit, since exchange rates tend to revert over decades.
Currency hedging has a cost driven by interest rate differentials between two countries. When US rates are higher than foreign rates, hedging international investments costs US-based investors roughly the rate difference per year.
Explore international stocks
Research global companies and understand their currency exposure using stock detail pages.
FAQs
Does currency risk always hurt returns?▼
No. Currency movements can help or hurt. A weakening dollar boosts the dollar value of foreign investments. Over long periods, currency effects tend to be a modest contributor to total return in either direction.
Should long-term investors hedge currency risk?▼
Many long-term investors choose not to hedge because the cost of hedging erodes returns and because currency fluctuations tend to even out over decades. Hedging may make more sense for shorter time horizons or concentrated positions.
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Intrinsic Investor is for education and research only. Not financial advice.