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Fund Spy

How Mutual Funds Handle the Falling (Rising?) Dollar

Their approaches are not always as simple as you might think.

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When the U.S. dollar is falling sharply against most other currencies--as was the case in 2006--or rising just as strongly, we hear from plenty of folks wondering how various mutual funds are positioned. Are the funds fully exposed to currency movements or are they negating that exposure by "hedging" back into the dollar?

The answers aren't as simple as you might think. Sure, many funds that own foreign stocks just don't hedge at all. So, if they put 10% of their portfolio into Swiss stocks, say, they also have 10% of their assets in the Swiss franc. But plenty of funds take other approaches--and those methods get far more complex than simply going to the other extreme and hedging all the exposure back into the dollar all the time.

In an era when even a casual follower of the financial news will often hear alarming stories about the ups and downs of the dollar, euro, and yen--and when these movements are having a substantial impact on mutual fund returns--it pays to understand how funds handle this issue. You may prefer one approach or another. Equally important, knowing these details can help you interpret your fund's performance more accurately--and keep you from being surprised or unduly disappointed.

Gregg Wolper does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.