How the Exchange Rate Affects Your U.S. Investments

As currency markets stabilize in some regions, many investors are taking a renewed interest in global opportunities. Easier access to U.S. dollars, fewer restrictions on international trading, and more diverse instruments make investing abroad more accessible than ever. But one variable still plays a key role: the exchange rate.

How do fluctuations in currency values affect your investments in the U.S.? Whether your local currency strengthens or weakens, the exchange rate can directly impact your overall returns. This article breaks down what you need to know in a simple and practical way.

More Flexibility, Same Currency Risks

Even in environments with freer currency movement and narrower spreads between official and market rates, the U.S. dollar remains a key benchmark. Whether you’re diversifying your portfolio internationally, investing through local equivalents of U.S. assets, or trading directly in USD, exchange rate movements can affect your outcomes.

Why Exchange Rates Matter for International Investing

When you invest in assets priced in foreign currency—like U.S. dollars—your entry and exit points are influenced by the current exchange rate. Here’s a simple example:

Example:

You invest $1,000 in a U.S. ETF. After one month, the ETF increases by 5%. But during the same period, the U.S. dollar drops 3% against your local currency. When converting your gains back, your actual return in local currency could be lower than expected.

In short, your real return depends not just on the asset’s performance in USD, but also on your local currency’s value at the time of purchase or sale.

When Does the Exchange Rate Impact You the Most?

When entering an investment: If you’re converting local currency into USD, a higher exchange rate means you’ll need more of your currency to invest the same amount.
When exiting an investment: If you plan to convert your USD returns back into your local currency, the exchange rate at that time determines your final amount.
When measuring performance in your own currency: Gains in dollars may shrink when converted if the exchange rate moves against you.

Which Investment Products Are Most Affected by Exchange Rates?

Not all investments are equally sensitive to currency shifts. Here are a few key categories:

Foreign Asset Certificates (like CEDEARs)

These instruments are traded locally but represent U.S. stocks or ETFs. Their value reflects both the underlying asset’s price and the implied exchange rate. Changes in the dollar’s value can impact local pricing.

ETFs or U.S. Stocks via Global Brokers

When you invest directly in USD through an international brokerage, currency changes don’t impact your holdings unless you plan to convert back. Timing your withdrawals can be important.

Dollar-Denominated Bonds

These can be sovereign or corporate and are priced in USD. If you convert their returns back into your local currency, exchange rate shifts can affect your final return—even if the bond’s price remains stable in dollars.

What Happens If the Dollar Weakens?

Although the U.S. dollar often strengthens over time, there are periods when it declines. If that happens and you convert your investments back to local currency, you may receive less than anticipated. For that reason, many investors choose to keep a portion of their portfolio in USD without converting it back.

How to Approach Exchange Rate Risk

While every investor’s strategy is different, here are a few widely used approaches to manage currency exposure:

Think long-term: Market cycles and exchange rates fluctuate, so longer horizons may help smooth out short-term volatility.
Diversify across currencies: Holding a mix of assets in both local and foreign currencies can reduce risk.
Clarify your investment goals: If your goal is to grow wealth in USD, currency fluctuations may be less relevant. But if you need to eventually convert returns, it’s worth considering.

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