Currency Risk for Global Investors: What You Need to Know

The quiet problem most investors miss

When you invest in foreign assets, you're making two bets: one on the investment itself and one on the currency. Your US stocks can go up 10%, but if the dollar weakens 10% against your home currency, your return is zero.

Currency movements can add to or subtract from your investment returns in ways that are completely disconnected from how your investments actually performed. This hidden layer of volatility catches many investors off guard.

How this actually works

Suppose you're a European investor who buys a US equity fund. Here's what happens:

1. You convert euros to dollars to purchase the fund
2. The fund rises or falls based on stock performance (in dollars)
3. When you sell, you receive dollars and convert back to euros
4. The exchange rate at step 3 may be very different from step 1

If the dollar strengthens against the euro during your holding period, you benefit—your dollar returns buy more euros. If the dollar weakens, you lose—your returns convert to fewer euros than expected.

This currency effect is separate from the investment return. A fund could rise 15% in dollar terms but deliver only 8% in euro terms if the dollar weakened. Or it could deliver 22% in euro terms if the dollar strengthened.

Currency movements of 5-10% per year are normal. Over long periods, currencies can shift by 30-50% or more.

Where people get this wrong

Ignoring currency risk entirely. Many investors focus only on the underlying investment's performance, forgetting that they'll eventually convert back to their home currency.

Over-hedging. Currency hedging eliminates currency volatility but has costs (hedging fees, roll costs) and removes the potential benefit of favorable currency moves. Full hedging isn't always optimal.

Under-hedging. Going completely unhedged with large international allocations exposes you to substantial currency volatility that can swamp investment returns.

Assuming currencies mean-revert. Some investors believe currencies will return to "fair value." But currencies can stay "over" or "under" valued for decades. There's no reliable way to predict currency movements.

What to focus on instead

• Understand your total exposure. What percentage of your portfolio is in foreign currencies? Are you comfortable with that level of currency risk?

• Consider partial hedging. A middle ground—hedging some but not all currency exposure—captures diversification benefits while reducing extreme currency volatility.

• Think about your spending currency. If you'll eventually spend the money in your home currency, currency hedging for that portion of your portfolio may make sense.

• Recognize that home bias isn't always irrational. Some preference for home-country investments, despite lower diversification, can be a reasonable response to currency risk—especially for near-term spending needs.

How this connects to long-term outcomes

Currency risk is one reason international diversification doesn't always feel like it's working. When your home currency is strong, your international investments lag. When your home currency is weak, they outperform.

Over very long periods (decades), currency effects tend to wash out somewhat. But over the 10-15 year periods that feel long to most investors, currency can be a dominant factor in returns.

The key is calibrating your exposure to your actual situation: your time horizon, your home currency, your spending needs, and your tolerance for additional volatility. There's no universally correct answer—just informed trade-offs.

Global diversification is valuable. But it comes with currency as a stowaway. Make sure you know it's there and have thought about what to do with it.