Real‑world examples of foreign exchange rates in investment decisions

Before definitions and theory, it helps to see how this plays out in real portfolios. Here are a few fast snapshots that anchor the rest of the discussion:

• A U.S. investor buys a European stock ETF, makes 10% in euros, but the euro falls 8% against the dollar. The impressive local‑currency gain shrinks to almost nothing in USD.
• A U.S. company builds a factory in Mexico. The peso weakens, so dollar profits rise even if local sales are flat.
• A retiree in the U.S. buys an unhedged international bond fund for income. Local yields look attractive, but a stronger dollar quietly erases a big slice of those coupon payments.

These are all simple examples of foreign exchange rates in investment decisions that investors face every day, often without realizing it. Now let’s unpack them in a more structured way.

How currency turns local returns into home‑currency results

Whenever you invest abroad, you face two separate bets:

• The asset return in local currency (the stock, bond, or property itself).
• The currency return when you convert back to your home currency.

The math is straightforward:

Total return in home currency ≈ (1 + local asset return) × (1 + currency return) − 1

If you’re a U.S. investor, the currency return is the move in the foreign currency versus the U.S. dollar.

A simple example of foreign exchange impact: you buy a European stock that rises 10% in euros, while the euro drops 10% vs. the dollar. Your approximate dollar return is:

(1.10 × 0.90) − 1 = −1%

You picked the right stock but lost money because of FX.

For context, the Federal Reserve’s broad dollar index swung by more than 10 percentage points between 2020 and 2024 as rates and inflation shifted globally. Those swings translated directly into currency gains or losses for international portfolios. You can track this index on the Federal Reserve’s data portal (FRED) at fred.stlouisfed.org.

Classic examples of foreign exchange rates in investment decisions for U.S. investors

1. U.S. investor buying European stocks during a weak euro

Consider a U.S. investor who bought a euro‑denominated ETF tracking large European stocks at the start of 2022.

• In 2022, the euro fell sharply against the dollar, touching near parity for the first time in about 20 years.
• Many European companies saw mixed performance in local terms, but for U.S. investors, the euro’s slide turned mediocre into ugly.

Suppose the ETF returned +5% in euros, but the euro fell −10% versus the dollar over the holding period. The result for the U.S. investor:

• Local return (EUR): +5%
• FX return (EUR vs. USD): −10%
• Combined: (1.05 × 0.90) − 1 ≈ −5.5% in USD

This is one of the best examples of foreign exchange rates in investment decisions because it shows how a mild gain in local markets can morph into a loss once you translate back to dollars.

2. Japanese stocks in a weak yen environment

Japan has offered another textbook example. The Bank of Japan held interest rates near zero for years while the Federal Reserve raised rates aggressively after 2022. That interest‑rate gap put persistent downward pressure on the yen.

Imagine a U.S. investor buys a Japanese equity ETF:

• Japanese stocks rise 15% in yen terms.
• The yen weakens −20% versus the dollar over the same period.

Result in dollars:

• (1.15 × 0.80) − 1 ≈ −8%

A double‑digit local gain becomes a negative dollar return. This is a painful example of foreign exchange rates in investment decisions where macro policy (interest‑rate differentials) overwhelms stock‑picking skill.

For historical yen data and policy context, the Bank for International Settlements (BIS) provides long‑term FX series at bis.org.

3. Emerging‑market bond fund: high yield, hidden FX risk

Emerging‑market bonds often look attractive because yields are higher than U.S. Treasuries. But if you buy local‑currency bonds, you’re effectively long both the bond and the currency.

Picture this scenario:

• You buy a local‑currency emerging‑market bond fund yielding about 7%.
• Local bonds rise modestly, giving you a total local return of +8%.
• At the same time, the local currency falls −12% vs. the dollar due to political instability and falling commodity prices.

Your dollar return:

• (1.08 × 0.88) − 1 ≈ −4.2%

Income investors often discover too late that the yield they chased was not enough to offset the FX hit. This is another clear example of foreign exchange rates in investment decisions where the headline yield doesn’t tell the full story.

Hedged vs. unhedged: two contrasting examples

Currency hedging lets you keep exposure to foreign assets while reducing or neutralizing currency swings. That choice—hedged or unhedged—is one of the most important examples of foreign exchange rates in investment decisions that ordinary ETF investors face.

4. European equity ETF: hedged vs. unhedged

Assume two U.S. investors each put $50,000 into European stocks:

• Investor A buys an unhedged ETF (exposed to the euro).
• Investor B buys a currency‑hedged ETF tracking the same index.

Over a year:

• European stocks: +10% in euros.
• Euro vs. dollar: −10%.

Results:

• Investor A (unhedged): (1.10 × 0.90) − 1 ≈ −1%.
• Investor B (hedged): ≈ +10% in USD, minus a small hedging cost.

Same stocks, same countries, same starting day—very different outcomes. This is one of the best examples of how foreign exchange rates in investment decisions can be managed rather than simply accepted.

5. Short‑term vs. long‑term horizon

Hedging decisions also depend heavily on your time horizon:

• Short‑term traders and tactical allocators often hedge because FX noise can dominate returns over months.
• Long‑term investors sometimes stay unhedged, betting that currency swings will partially wash out over a decade and that hedging costs will eat into returns.

For example, a U.S. investor with a 20‑year horizon might accept yen volatility in a Japan allocation, while a corporate treasurer with a 12‑month cash need in euros might hedge aggressively.

The International Monetary Fund (IMF) regularly publishes research on currency volatility and capital flows, which can help frame these decisions; see their data and reports at imf.org.

Corporate and real‑asset examples of foreign exchange rates in investment decisions

FX risk is not just a portfolio problem. Companies and real‑asset investors constantly make investment decisions shaped by currency moves.

6. U.S. multinational with European revenues

Take a U.S. tech company that earns 40% of its revenue in Europe, reported in euros but consolidated in dollars.

• If the euro strengthens vs. the dollar, each euro of revenue translates into more dollars.
• If the euro weakens, the same physical sales look smaller in USD terms.

Management has to decide whether to:

• Hedge a portion of expected euro revenues using forwards or options.
• Match euro revenues with euro costs (for example, paying European staff and suppliers in euros), creating a natural hedge.

Their capital expenditure decisions—where to build data centers, where to hire—are real examples of foreign exchange rates in investment decisions at the corporate level. A weaker euro can make European operating costs cheaper in dollar terms, nudging investment toward the region.

7. U.S. buyer of foreign real estate

Now shift to a U.S. investor buying an apartment in Spain as a rental property.

Say in 2021:

• Purchase price: €300,000.
• EUR/USD rate: 1.20.
• Dollar cost: $360,000.

By 2023, assume:

• Property value: still €300,000 (flat in euros).
• EUR/USD rate: 1.05.
• Dollar value: about $315,000.

The investor has a −12.5% loss in USD even though the property price didn’t change in local terms. Rental income in euros will also convert into fewer dollars.

This is a very tangible example of foreign exchange rates in investment decisions: you feel it when you sell the property, refinance, or repatriate rental income.

8. Private equity and cross‑border deals

Private equity funds and corporate acquirers also live with FX risk:

• A U.S. fund buys a British company in pounds.
• The business grows nicely in GBP terms.
• The pound weakens significantly vs. the dollar.

On exit, the internal rate of return in dollars can be far lower than the local‑currency IRR the deal team modeled. Many cross‑border deals now include explicit FX assumptions in their investment memos, often running best‑ and worst‑case currency scenarios.

2024–2025 trends shaping FX risk in portfolios

The last few years have been a reminder that currencies are not a sideshow:

• Interest‑rate differentials: The Federal Reserve’s rate path versus the European Central Bank, Bank of Japan, and emerging‑market central banks continues to drive dollar strength or weakness. Higher U.S. yields tend to support the dollar, pressuring foreign‑currency returns for U.S. investors.
• Inflation differentials: Countries with higher inflation often see weaker currencies over time. That’s a key risk for emerging‑market debt investors.
• Geopolitics and trade: Sanctions, tariffs, and supply‑chain realignment affect capital flows and FX. For example, concerns about energy security and war in Europe have periodically weighed on the euro.
• Safe‑haven flows: In global stress episodes, the dollar, Swiss franc, and yen often attract safe‑haven buying, which can hurt U.S. investors’ foreign holdings at exactly the wrong time.

The Federal Reserve and IMF both provide free data and commentary that investors can use to track these macro drivers. For U.S. economic and financial data, see federalreserve.gov. For global macro and FX‑related analysis, the IMF’s data portal at imf.org is widely used by professionals.

How to think about FX when building an international portfolio

Pulling this together, here’s how experienced investors approach the problem, using real examples of foreign exchange rates in investment decisions as a guide.

Separate the investment thesis from the currency thesis

Ask yourself two distinct questions:

1. Do I like this foreign asset in local terms?
2. Do I want exposure to this currency versus my home currency?

If you love Japanese equities but are nervous about the yen, for instance, you may choose a hedged ETF. If you’re bullish on both European stocks and the euro, you might pick an unhedged fund.

Match currency exposure to your liabilities

Think about where you will spend the money:

• If you plan to retire in the U.S. and spend dollars, unhedged FX exposure adds volatility to your future spending power.
• If you plan to spend part of your life in Europe or send children to school abroad, having some euro exposure can be a feature, not a bug.

Institutional investors like pension funds routinely align currency exposures with their long‑term liabilities. Individual investors can borrow the same logic and apply it to their own goals.

Use multiple examples to stress‑test your plan

When you model your portfolio, don’t just assume a straight‑line currency path. Take the examples of foreign exchange rates in investment decisions above and run your own versions:

• What if the dollar strengthens 15% over the next three years?
• What if your favorite emerging‑market currency drops 20% during a political shock?
• What if hedging costs rise as interest‑rate gaps widen?

By framing your assumptions with concrete scenarios, you avoid the trap of treating FX as an afterthought.

FAQ: examples of foreign exchange rates in investment decisions

Q: Can you give a simple example of foreign exchange rates affecting a stock investment?
Yes. Suppose a U.S. investor buys a German stock that rises 12% in euros. Over the same period, the euro falls 10% against the dollar. The approximate dollar return is (1.12 × 0.90) − 1 ≈ +0.8%. The stock did well locally, but the currency move nearly wiped out the gain. This is one of the most straightforward examples of foreign exchange rates in investment decisions that every international investor should understand.

Q: What are some other common examples of FX risk in everyday investment decisions?
Common examples include buying unhedged international equity or bond funds, purchasing foreign real estate, investing in ADRs of non‑U.S. companies, and holding cash in foreign bank accounts. In each case, your final result in dollars depends on both the asset’s local performance and the currency move over your holding period.

Q: Should individual investors always hedge foreign exchange risk?
Not necessarily. Hedging reduces FX volatility but comes with costs and complexity. Short‑term investors and those with dollar‑denominated spending goals often hedge more. Long‑term investors may accept FX swings in exchange for lower hedging costs and potential diversification benefits. The right answer depends on your time horizon, risk tolerance, and view on currencies.

Q: Are there examples of foreign exchange rates helping investors instead of hurting them?
Absolutely. If you bought a foreign asset and the local currency strengthened against the dollar, your dollar return would be higher than the local return. For instance, if a stock rose 8% in local terms and the currency appreciated 7% vs. the dollar, your approximate dollar return would be (1.08 × 1.07) − 1 ≈ 16.6%. In this case, FX was a tailwind.

Q: Where can I find reliable data to analyze currency moves for my own investment decisions?
For U.S. investors, the Federal Reserve’s FRED database at fred.stlouisfed.org offers historical exchange rates and dollar indexes. The IMF’s data portal at imf.org and the BIS statistics at bis.org provide additional global FX and macroeconomic data. These sources are widely used by professional investors who regularly evaluate examples of foreign exchange rates in investment decisions.