Currency Fluctuations and Their Impact on International Funds

Welcome to Please help us personalize your experience.

Select the one that best describes you

Your personalized experience is almost ready.

Join other Individual Investors receiving FREE personalized market updates and research. Join other Institutional Investors receiving FREE personalized market updates and research. Join other Financial Advisors receiving FREE personalized market updates and research.

Thank you!

Check your email and confirm your subscription to complete your personalized experience.

Thank you for your submission, we hope you enjoy your experience


Find the latest content and information here about the 2019 Charles Schwab Impact Conference.


Receive email updates about fund flows, news, upcoming CE accredited webcasts from industry thought leaders and more.

Content focused on helping financial advisors build successful client relationships and grow their business.

Content geared towards helping financial advisors build better client portfolios.

Get insights on the industry trends and investment news from leading fund managers and experts.

Currency Exchange chart

International and Global Stock Funds

Currency Fluctuations and Their Impact on International Funds

David Dierking Oct 17, 2017

In case you are wondering whether mutual funds are right for you at all, you should read why mutual funds, in general, should be a part of your portfolio.

The Concept of Currency Risk

It is important to note that currency risk can affect both the price appreciation of a security and the dividend and interest payments it makes.

How to Hedge Against Currency Risk

Consider the PIMCO Foreign Bond Fund (Unhedged) (PFUAX) and the PIMCO Foreign Bond Fund (USD-Hedged) (PFOAX). The two funds are substantially similar, except that one is currency-hedged and the other is unhedged. The U.S. Dollar Index has fallen this year, meaning funds that are denominated in the dollar would see diminished returns due to the decline in the exchange rate. That’s what we’ve seen with these two funds in 2017, with the unhedged fund up almost 9% year-to-date, but the U.S. dollar-hedged fund up only 2%.

Be sure to check our list of currency mutual funds here.

Why Exchange Rates Might Move

  • Interest rates – Higher interest rates lead to higher rates of return for investors. An increase in demand from abroad for these higher rates can translate into higher value in the domestic currency, and vice versa.
  • Trade balance – The balance of trade between imports and exports can impact the supply and demand for currencies. If a country’s exports exceed its imports (or the overall pricing of exports rises faster than the pricing of imports), it can result in greater value for its currency as well.
  • Public debt – High levels of government debt can have a negative impact on a country’s exchange rate. A mountain of debt can create the perception that the country is in poor financial shape and has the potential of defaulting if it accumulates debt that it can’t pay off.
  • Political environment – A country experiencing political unrest or governmental instability likely makes for a less attractive investment opportunity. The markets hate uncertainty, and concerns about the political environment generally lead to lower value in the domestic currency.

Check out our guide to currency mutual funds. While you are at it, you can also check our guide on international mutual funds.

The Pros and Cons of Currency Hedging

On the other hand, currency risk hedging does not eliminate some of the risks of exchange rate movements. If you hedge away currency risk, there’s still the risk that you could miss out on gains if the currency appreciates in value. It’s difficult to predict movement in exchange rates, so the risk of missing out could be costly.

Key Considerations for Investors

Another important consideration to note is that hedged funds typically cost more to operate than unhedged funds. The additional step of layering on forward contracts and managing currency positions tends to drive up expense ratios.

The Bottom Line

Be sure to check our News section to keep track of recent fund performances.

Sign up for Advisor Access

Receive email updates about best performers, news, CE accredited webcasts and more.

Please Enter Your Email
Please Select Your Advisor Type

Popular Articles

Download Our Free Report

Why 30 trillion is invested in mutual funds book