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Fund Spy

How Does Currency Impact Your Portfolio?

To hedge or not to hedge?

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Currency can have a large impact on international equity returns. The past three years though May 2017 are a great case in point. Over that period the U.S. dollar has been on a tear. Exhibit 1 (below) shows the weighted average of the foreign-exchange value of the U.S. dollar against a broad currency basket.

This U.S. dollar strength has proved a strong headwind for most international equity strategies, as the clear majority of U.S.-based foreign-equity funds do not hedge their foreign-currency exposure. They buy foreign stocks in the currency of each company’s domicile. Thus their returns suffer when those currencies decline against the dollar.

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