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Currency’s Effect on International Returns?

By: Investor Solutions

By: Richard Feldman, MBA, CFP®, AIF®

The falling dollar has been at the forefront of the financial press since the market bottomed out in March and the dollar started depreciating against most major international currencies. The dollar had been depreciating for most of the year in 2008 until Lehman Brothers declared bankruptcy and started a liquidity crisis that washed through the global financial system. The result was a flight to safety and liquidity for financial assets which caused the dollar to appreciate against all major currencies. Now that the financial crisis has started to unwind, the US Government has had the printing presses working non stop and short term interest rates are at virtually zero, the dollar has started to depreciate again.

A Depreciating US Dollar

For a US citizen investing internationally, a depreciating US dollar would improve international investment results, depending on how the international country’s currency performs versus the dollar as well as how the actual international country’s stock market performs in local terms. The Brazilian Real has appreciated greatly against the dollar helping the Brazilian stock market appreciate by over 100% year to date. To follow is a chart of selected international markets in both local denominated returns as well as US denominated returns:

MSCI: Selected Countries

Local Returns

USD Returns

Currency Effect

United Kingdom
































**Returns Through 09/30/2009 MSCI Gross Index

Source: JP Morgan / MSCI Barra

As you can see from the chart above the Brazilian Real and the Russian Ruble have appreciated the most against the US dollar adding 47.70% and 19% in currency gains for US domiciled investors, respectively.

How Currency Works

Suppose you purchase an index investment in British stocks and the index of British stocks increases by 15% in one year in terms of British Pounds. If during the same year the British Pound increases in value by 10% against the U.S. dollar your total return would be 25%. Conversely, when the dollar appreciates against international currencies it has a negative effect on total return as we saw at the end of last year when the US dollar strengthened strongly against most international currencies which caused already weak international results to be even worse.


The dollar depreciated by 36% from the end of 2001 to the end of 2008 against the Euro making an investment in that currency 56% more valuable once it was converted back to dollars and that is before counting any appreciation of the underlying investment.[1] The US dollar has recently replaced the Japanese Yen as the main funding vehicle for the carry trade which means an investor typically borrows in a currency with extremely low interest rates and invests in higher yielding assets in other countries like currencies, fixed income investments, and commodities. The carry trade was virtually wiped out in the aftermath of Lehman Brothers but is making a comeback as institutions and individuals rediscover their appetite for risk.

For a US domiciled investor, currency can greatly magnify or detract from international investments depending on what the US dollar is doing versus international currencies. Currently the depreciating dollar is adding to investment returns. The Euro started out 2009 at $1.40 per USD and has since strengthened to $1.49 per USD for a total gain for the Euro against the dollar of 6.5%.

Another factor to watch is how much foreign countries continue to hold in Dollar reserves since there has been a lot of rhetoric about China moving some of their reserves out of the US Dollar to other reserve currencies like the Euro.

[1] Ameriprise Financial – Currency Risks & International Investing