The hope for a stronger U.S. dollar is very much in
the news lately. But most Americans, other than
tourists beyond our shores, don't focus on what that
means to them. For U.S. investors, the upshot is not
always great. In fact, for most, currency fluctuations
worldwide (and not just that of the dollar) are an
invisible force that they don’t reckon with until it’s too
Calculating currency valuations from one country to
another is complex and, if you’re like most people,
you don’t give the subject much thought until you get
ready to travel. You might visit your bank to swap
greenbacks for a few euros, but usually you just plan
to use a credit card to cover your tab on the Spanish
Rivera or at the Tuscan villa. For corporations and
mutual funds, though, fluctuating currency rates carry
much more weight.
Let’s look at one recent global monetary event. In
2015, Switzerland reaffirmed the commitment to keep
its franc at $1.20 to the European Union’s euro – then
suddenly changed its position, sending the euro
falling, the franc soaring and world markets reeling.
(in April 2018, the franc touched a three-year low of
So what? Maybe you never plan to go to Europe.
Your portfolio, likely containing international
investments in its mutual funds, likely still felt the
For one, German businesses suddenly found it much
more expensive to buy Swiss watches, chocolates or
cheese and Switzerland’s exporters were caught in a
battle literally overnight. Meanwhile, Swiss citizens
enjoyed welcome wealth.
Unlike Americans who may plan only an occasional
trip to Paris, Swiss citizens commonly drive to France
for the day. The currency move suddenly put an extra
15% to 20% of buying power into the hands of Swiss
who visit France.
We live in a global society and understanding
currency fluctuation means much more than
calculating our travel costs and daily vacation
spending. Exporters win or lose every time currency
The Dollar vs. the Euro
The Euro was introduced on January 1, 1999 as the
new “single currency” of the European Union and
peaked just shy of $1.60 vs. the U.S. dollar in 2008
and has since declined to about $1.23 today.
But don’t feel too flush with the dollar’s comparative
value. In simple terms, that new Mercedes is more
affordable here but the Apple iPhone costs much
more in Germany than in this country. But here is why
investors should take note: Nearly half the earnings in
the Standard & Poor’s 500 come from companies
based outside the U.S.
While a strong dollar will benefit some, it will
negatively impact others. Here are some things to
Benefits of a Strong Dollar
Travelling overseas is cheaper
Imports are cheaper
Foreign companies investing in the US will
Negatives of a Strong Dollar
Tourism in the U.S. is more expensive
Exports are more expensive
U.S. companies that conduct business outside
the U.S. will suffer
For most of us, we don’t really think about the
strength of the U.S. dollar vs. the Euro or any other of
the 180 global currencies. In fact, most of our
“currency risks” are usually imbedded in our mutual
funds. But remember, there are currency risks in just
about all of your equity mutual funds, not just the
international or global ones. For example, that U.S.
Large Cap Growth fund by definition invests in large
U.S. companies that are exposed to currency
movements because of their underlying business.
As such, it’s absolutely worth knowing whether a
portfolio manager is “fully-hedged” against currency
risk or not. Many portfolio managers simply hedge
currency risk away – at a price of course – which
makes that mutual fund more expensive. Others
hedge the major currencies. Or don’t. Irrespective of
their decision to hedge or not, currency movements
will play a role in their total returns – and yours as
MSCI EAFE – Hedged vs. Unhedged
The MSCI EAFE Index is a stock market index that is
designed to measure the equity market performance
of developed markets outside of the U.S. (and
technically Canada). Let’s look at yearly returns of the
MSCI EAFE Index – hedged and unhedged. From
The MSCI EAFE 100% Hedged to USD Index
represents a close estimation of the performance that
can be achieved by hedging the currency exposures
of its parent index, the MSCI EAFE Index, to the USD,
the "home" currency for the hedged index. The index
is 100% hedged to the USD by selling each foreign
currency forward at the one-month Forward weight.
The parent index is composed of large and mid-cap
stocks across 21 Developed Markets countries and its
local performance is calculated in 13 different
currencies, including the Euro.
Final Thoughts from a Financial Advisor
Like all financial decisions, the further out you plan
your trip, the more successful your journey.
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