Currency Risk: Why It Matters to You
Some investment professionals encourage using foreign stocks and bonds to diversify portfolios. Since overseas assets often don't track their U.S. counterparts closely, a globally diversified portfolio might help reduce volatility. These investments can directly introduce currency risk, which you might invite as part of your diversification strategy. But currency risk could be present among your other investments as well.
Currency risk refers to the potential for either better or worse financial performance due to the fluctuation of foreign exchange rates between your home currency and another where you have exposure. For example, say you hold a European stock denominated in euros that has risen 10 percent. But during this time, the euro has fallen 10 percent against the U.S. dollar. If you sold your position and converted your funds back to dollars, you'd break even.
When you buy a foreign security, you're investing in the asset itself and in the currency in which it's denominated. If you hold an investment denominated in a currency that outperforms the U.S. dollar, this can boost your returns, while an investment denominated in a currency that underperforms the dollar can lower your returns.
Source Fool.com
