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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Thursday, September 07, 2006

The Impact of Currency Fluctuation

Currency fluctuation is something you need to pay attention to when investing internationally. That fluctuation can increase or decrease the dollar value of an investment.

  1. Market performance: one component of fireign investing
  2. Currency translation: supply and demand of a currency fluctuates the price of securities. Local currency investors of a certain country will have different returns than you will have in the U.S. on the same investment.
When U.S. investors purchase foreign securities you have to convert the amount from the U.S. dollars to local currency. When sold they are converted back to dollars. So a strengthening dollar reduces the value of the foreign investment by an American and a weakening dollar increases the value of the foreign investment.

Example, in 2000 UK stocks returned -4.5% to a local investor and the pound depreciated (-7.2%) versus the dollar giving the U.S. investor a return of -11.8%. So this goes to show you that it is important to understand the effects of currency fluctuation.

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