Risk
Currency risk
Also called FX risk or Exchange-rate risk
The risk that exchange-rate moves change your return on a foreign holding.
How it works
Owning a foreign asset means owning two things: the asset and the currency. A US share can rise 10% in dollars and be flat for a European investor if the dollar falls 10% against the euro.
Over long horizons currency effects tend to wash out somewhat. Over the horizons people actually care about, they can dominate.
Where it misleads people
Currency-hedged share classes remove this risk and add a cost that varies with the interest-rate difference between the two currencies. When that gap is wide, hedging is expensive.
Worked example
A €10,000 investment in a US fund that gains 8% while the dollar falls 8% against the euro leaves the investor roughly flat.
Related terms
- HedgingTaking an offsetting position to reduce a specific risk you do not want.
- Home biasThe tendency to hold far more of your own country’s market than its share of the world warrants.
- DiversificationSpreading money across things that do not move together, so no single failure can decide your outcome.
- Carry tradeBorrowing in a low-interest currency to invest in a higher-yielding one, keeping the difference.
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Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.