Currency risk: how exchange rates affect your investments
Why the exchange rate can multiply or wipe out your gains, with real-world examples, and how to measure it.
Oct 22, 2026 · 4 min read
Many people invest in US stocks and track their results in dollars. But they spend in euros, pounds, pesos or reais. Between those two things sits a factor that can change everything: the exchange rate. That's what we call currency risk.
The idea in an example
Imagine Sophie, who lives in Madrid. At the start of the year she buys a US stock ETF for 1,000 dollars, when one euro buys 1.10 dollars. In euros, she invested about 909.
At the end of the year two things happen:
- The ETF rises 10%: it's now worth 1,100 dollars.
- The euro strengthens and one euro now buys 1.25 dollars.
What is her investment worth in euros? 1,100 ÷ 1.25 = 880 euros. Even though the ETF rose 10%, Sophie lost about 3% in her own currency.
Now the opposite case. Mateo lives in Bogotá and does the same, but in his case the Colombian peso loses 15% of its value during the year. His ETF rises 10% in dollars and, once converted, he earns well over 10% in Colombian pesos.
The numbers in these examples are illustrative. The lesson is clear: your real return is the asset's return plus (or minus) the currency's move.
The intuitive formula
Without getting into exact math, a good approximation is:
Return in your currency ≈ the asset's return in its own currency + the change in that currency's value against yours
If the dollar strengthens against your currency, your dollar assets earn an extra. If it weakens, they lose part of what they gained.
Is currency risk bad?
Not necessarily. It has two sides:
As a risk: it adds volatility. An asset that's calm in its own currency can look very jumpy from yours.
As protection: in many economies, the local currency weakens precisely when there's a crisis. At those moments, holding assets in dollars, Swiss francs or yen cushions the blow. It's a form of diversification in itself: your portfolio no longer depends only on the health of your own economy.
For someone living in Argentina, for example, investing in assets from other countries has historically been a way to protect purchasing power against local inflation.
Currencies that move together
In moments of global stress, emerging-market currencies tend to weaken at the same time: the Brazilian real, the Mexican peso, the South African rand, the Turkish lira. That means holding stocks from several emerging countries doesn't diversify currency risk as much as you'd think: their currencies are likely to fall together.
Currencies considered "safe havens", such as the US dollar, the Swiss franc or the yen, tend to behave differently. That's why a portfolio that mixes currencies from different regions is usually more stable.
How we measure it in the optimizer
When you choose your base currency (USD, EUR, MXN, BRL, CLP, COP, PEN or ARS), the tool does this:
- It takes each asset's price in its local currency (yen, euros, reais…).
- It converts it to your currency at each day's exchange rate.
- It calculates returns, volatility, correlations and the optimal portfolio with those converted prices.
That way, currency risk is inside the calculation, not something separate. In the exposure section you'll also see how much of your portfolio depends on each currency, plus an alert if more than 70% depends on a single currency other than yours.
A revealing experiment
Try this in the optimizer:
- Load the "Global diversified" example.
- Calculate with USD as the base currency and note the volatility and return.
- Switch the base currency to EUR (or your own) and calculate again.
You'll see the numbers change, sometimes a lot. Even the optimal weights can be different: an asset that looked risky in dollars can look more stable from another currency, and vice versa.
Can you hedge currency risk?
There are instruments to "hedge" the currency, such as currency-hedged ETFs or futures contracts. But they come with costs and complexity, and for most long-term investors, diversifying across several currencies is a simpler alternative.
Frequently asked questions
Should I measure everything in dollars? Measure in the currency you'll actually spend the money in. If your goals are in euros, measure in euros.
What if I earn in dollars? Then your natural base currency is the dollar, and your currency risk lies in assets from other countries.
Is the exchange rate you use the official one? We use the reference exchange rate published by our data source. In countries with several exchange rates, such as Argentina, it may differ from the one you get in practice.
In short
The exchange rate can add or subtract a lot from your international investments. It's not an enemy: it also protects you when your currency weakens. What matters is measuring it in your own currency and not letting everything depend on just one. Test your portfolio in your currency and see the difference.
Try it with your own assets
Build a list and see which portfolio the model calculates, in your currency.
Disclaimer: Educational and simulation tool. It is not investment advice or a personalized recommendation. Past performance does not guarantee future results.