Skip to content
aksoneri
Intermediate2 min read

Currency risk

A good investment in dollars can turn out to be a bad one in euros.

Two moves, one result

You buy an American ETF that gains 10% over the year. At the same time, the dollar weakens 10% against the euro. Your return in euros comes out at roughly zero.

It works the other way too: an American market that goes nowhere, paired with a strengthening dollar, can hand you a decent profit in euros.

Neither has anything to do with the quality of the companies you bought. It is simply a second movement layered on top of the first.

A worked example

  1. You invest €1,000 in an American ETF

    It is exchanged into about 1,100 dollars at the day's rate, minus the platform's margin.

  2. The ETF gains 10% over the year

    You now have about 1,210 dollars. In dollars, everything went well.

  3. The dollar weakens 10% against the euro

    Those 1,210 dollars convert back into roughly €1,000. The whole gain vanished in the exchange.

Should you hedge?

Currency hedging comes at a cost, which usually reflects the interest-rate gap between the two currencies. It is not free.

For long-term stock holdings, most of the arguments point against hedging: currency swings tend to even out over decades, while the cost of hedging keeps adding up.

For bonds it is the opposite. If you hold foreign bonds for stability, a 10% currency swing destroys that stability — so hedging makes sense there.

Where the cost hides

For a small investor, the biggest currency cost is not the swings but the margin the platform takes on every exchange.

A margin of 0.5% when you buy and 0.5% when you sell is a full percent, paid every time you go in and out.

Always check the rate you are offered against the market rate. The difference is a fee that is rarely advertised as one.

Key terms in this lesson

Currency risk
The risk that exchange-rate moves change your return in your home currency.
Hedged
A fund that removes the exchange-rate effect, in return for an annual cost.

Quick check

Your American ETF gained 8% and the dollar weakened 8%. What did you earn in euros?

Progress is saved on this device only.