Currency risk for European investors – when the exchange rate eats your returns

Most European investors hold a large share of their portfolio in US dollars, often without thinking about it: a global equity ETF typically holds around 70% US shares. The exchange rate then becomes part of the return.

#A simple example

You invest €10,000 in US shares when EUR/USD is 1.05. A year later the shares are unchanged but EUR/USD is 1.15. Your holding is still worth $10,500, but in euro that is only €9,130 – a loss of about 8.7% from currency alone. If the dollar had strengthened instead, you would have gained.

#It is different in every European currency

• Euro area: exposure is mainly to USD, GBP, CHF and JPY.
• UK: sterling-based investors face the same issue against the dollar and euro.
• Switzerland: the franc's long-term strength has made unhedged foreign investments less rewarding in CHF terms.
• Poland, Czechia, Hungary, Romania, Sweden, Norway: investors are exposed to both the euro and the dollar, and local currencies can be more volatile.

Use the euro exchange-rate history chart to see how much these currencies have moved.

#When currency risk matters – and when it doesn't

• Long-term equity investing: over decades, currency moves are one factor among many. Many investors accept them for global equities.
• Bonds and cash-like holdings: currency moves can dwarf the yield, so hedging is more common.
• Short-term trading: profits on USD-priced CFDs are converted to your account currency; the conversion rate and fee affect your result.
• Spending plans: if you will spend the money in euro, zloty or kronor, that is your reference currency.

#Ways to manage it

1. Currency-hedged ETF share classes – hedge the main currency exposure inside the fund, at a small annual cost.
2. Diversify across regions and currencies instead of concentrating on one.
3. Hold an account in the instrument's currency to avoid repeated conversions, if your broker offers multi-currency accounts.
4. Hedge with forwards, futures or options for large or short-term exposures – see hedging.

#Tax can add a twist

Several European countries calculate capital gains in local currency using exchange rates on the purchase and sale dates. That means you can owe tax on a gain that came purely from the exchange rate – or have a loss that partly offsets other gains. Check your country guide.