🌍 Global Markets · Lesson 3 of 6 · 8 min
Exchange Rates — How Currency Moves Affect Your Portfolio
💱 In 2022 the dollar surged more than 30% against the yen, from ¥115 to ¥152. A Japanese investor holding US stocks got a windfall without touching a single share. An American in Tokyo got a 30% raise without asking for one. Apple lost about $10 billion in a single quarter. Exchange rates are the layer of your portfolio nobody thinks about until it's the only thing that mattered.
💡 Key idea
Strong dollar = cheaper imports, weaker EM returns. Weak dollar = international stocks look better to US investors.
🧠 Why it matters
Exchange rates determine how much one currency buys of another. They affect: international stock returns, import costs and inflation, corporate profits, and tourism. Key drivers: interest rate differentials, inflation gaps, trade balances. A rising dollar = cheaper imports, pain for US exporters.
🌍 In the real world
🏢 Apple earns ~60% of revenue outside the US. When the dollar is strong, foreign profits translate back into fewer dollars — hurting earnings. In the December 2022 quarter alone, the strong dollar knocked roughly 8 percentage points — about $10 billion — off Apple's revenue. The currency nobody thought about hit the portfolio everyone owned.
📌 Takeaways
- Strong dollar helps US importers, hurts US exporters
- Currency-hedged ETFs (HEFA) remove FX risk
- Interest rate differential = #1 driver of currency moves
📖 Terms in this lesson
Exchange rate: What one currency is worth in another.
✅ Test yourself
A strong US dollar hurts which type of US company most?
- Pure domestic companies
- US exporters — their products get more expensive for foreign buyers
- Banks
- Utility companies
Answer: B · US exporters — their products get more expensive for foreign buyers
US exporters price goods in dollars. A stronger dollar makes American products more expensive abroad — reducing demand and squeezing revenues.
Why do interest rate differentials drive currency movements?
- They don't — currencies are random
- Higher-yielding currencies attract global capital inflows seeking better returns
- The Fed fixes all exchange rates
- Currency moves are driven by gold reserves only
Answer: B · Higher-yielding currencies attract global capital inflows seeking better returns
If the US pays 5% on T-Bills and Japan pays 0%, global capital flows into dollars for yield — increasing demand for USD and strengthening the dollar vs the yen.
What's a currency-hedged ETF?
- An ETF that only invests in one currency
- An ETF using derivatives to remove exchange rate risk from international returns
- A futures contract on currency
- An ETF that only owns currencies, not stocks
Answer: B · An ETF using derivatives to remove exchange rate risk from international returns
Currency-hedged ETFs (like HEFA) strip out the FX component — you get the international stock performance without exchange rate swings. Useful when you expect the dollar to strengthen.
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