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Glossary entry · Trade-offs

Currency risk

Definition

When you buy a foreign asset, your return has two parts: how the asset moved in its own currency, and how that currency moved against yours. A great year for the S&P 500 in dollars can become a bad year in euros if the dollar weakens enough. Over decades and across diversified holdings, the effect tends to wash out; over short periods, it can dominate.

Example

In 2022 the S&P 500 fell ~19% in USD but only ~14% in EUR, because the dollar strengthened. In 2003 the same dollar weakening went the other way.

From the lessons
Lesson · 10

Currency risk

This term appears in a longer lesson, where the idea gets the proper treatment with examples and a working visualization.

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