Currency Risk

Currency risk (also called forex risk or exchange rate risk) is the chance that changes in currency values will hurt your returns on international investments or increase costs for foreign transactions.

How It Works: You invest $10,000 in a European stock fund.

• Stock price stays flat (0% return in euros)
• But EUR/USD drops from 1.10 to 1.00 (-9%)
• Your investment is now worth $9,100 in dollars
• You lost 9% even though the stocks didn't change

Types of Currency Risk:

1. Transaction Risk: Exchange rate changes between signing a deal and payment
2. Translation Risk: Converting foreign subsidiary earnings to home currency
3. Economic Risk: Long-term shifts in competitiveness due to currency moves

Who's Exposed:

• International investors (foreign stocks, bonds, ETFs)
• Travelers with trips booked months in advance
• Businesses importing/exporting goods
• Retirees living abroad on fixed income

Real Examples:

• 2016 Brexit: GBP dropped 11% overnight, crushing UK investments for US holders
• 2022 Strong Dollar: Emerging market stocks down 15% even though local returns were positive
• Japanese Yen 2023: Fell 20% vs USD, devastating for Americans living in Japan

How to Manage It:

• Currency-hedged funds: Remove currency risk (pay 0.3-0.5% fee)
• Diversification: Hold multiple currencies, risks offset
• Natural hedging: Have assets in currencies you'll spend (retiring abroad? Hold local investments)
• Accept it: Long-term investors often don't hedge—currencies mean revert over decades

The Bottom Line: Currency risk can add or subtract 10-20% to your returns on international investments. For long-term investors, it often evens out. For short-term needs, consider hedged funds.