How Do Currency Exchange Rates Affect Investments?

A country’s currency is a highly volatile asset. It varies according to numerous aspects such as inflation, interest rates, geopolitical stability, trade balance, public debt, and the nation’s economic health.

There are several examples of news headlines reporting how the rupee has dropped or risen against the dollar.

Have you ever wondered what it means when the rupee strengthens or weakens, how it influences the market around us, and how it affects our investments?

We will discuss how the currency exchange rate affects your investment in this article.

The foreign investor impact

The price of one currency relative to another currency is referred to as the foreign exchange rate or exchange rate. When we say, for instance, that one dollar is equal to 81 rupees, we are expressing how one currency compares to another. The rupee is weakening and the dollar is strengthening if this rises to Rs 82. Simply, it costs an additional three rupees to obtain one US dollar.

As a result, given that the majority of international trade is conducted in dollars, the demand for commodities may decline globally. Due to the fact that the majority of international investments are done in US dollars, this might lower the value of investments made by foreign investors in India.

Assume, for instance, that you have stock investments in the United States and that news reports indicate that the dollar is losing ground to the rupee. Although your rupee investment is increasing in value, the investment in a US firm will reduce the net return.

Impact on retail investors

What effect does this have on your investment portfolio, then?

Impact on mutual funds:

First of all, currency shift is a key factor in determining how your investment in the mutual fund will perform if you have invested in mutual funds where the fund manager has put the money in foreign stocks or bonds. Your foreign mutual fund investment would appreciate an increase in value if the dollar strengthened. Similarly, your investment can lose value if the value of the dollar declines.

Impact on domestic investments:

Even if you just own local assets and have no international interests, you may still be subject to currency risk in the global market. Many corporations listed on the stock market have assets in foreign firms; if the value of that nation’s currency falls, your investments may also suffer.

However, many businesses also export their products and services to nations with various currencies. A reduction in the foreign exchange may result in a drop in their earnings, which would have a negative effect on the success of the business and, consequently, your investment. After all, the corporation would earn less from its international activities.

It’s possible that an Indian business is importing American raw materials. The corporation would have to pay more in rupees if the dollar strengthened versus the rupee, increasing their costs and reducing their net profit. This can lead to poor financial performance, which might influence the performance of its stocks and your investment portfolio.

The takeaway

Forex swings can significantly affect your investment portfolio whether or not you invest in international equities. Individuals who have assets in foreign stocks and mutual funds will inevitably suffer the most from currency changes. However, the indirect effects of the price volatility may also be felt by individuals holding domestic assets.

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