Currency Effect of International Exposure

When you are invested in international stocks, both developed and emerging, you are not just buying foreign companies, but you are also indirectly invested in foreign currencies.

Imagine you invest in a Canadian company when the currency has an exchange rate of 1:1 CAD to USD. Let’s say the Canadian company has a zero return for the year, but the CAD is now worth $1.10. When the return of this investment gets converted back to USD, you would have made 10% on currency moves alone, even though the stock was flat.

On the flip side, if the CAD weakens relative to the dollar, the same investment will show a loss in USD terms, even though the stock stayed the same.

Over time, currency movements can either amplify or mute the returns of foreign investments.

The following chart (from the Federal Reserve Bank of St. Louis) shows the Canadian Dollar to U.S. Dollar Exchange rate over time. The USD has appreciated against most world currencies over the last 15 years, which has muted the returns of international stocks, but this hasn’t always been the case.

Currencies tend to move in cycles. For example, during the first quarter of 2025, the dollar weakened versus other currencies, providing a “tailwind” for international returns.

Predicting where the dollar will go next is notoriously difficult. Instead, exposing your portfolio to international stocks is not a bet on currency moves, it’s about spreading your risk beyond the U.S. economy, owning companies that don’t exist here, and capturing growth in other parts of the world.

Going back to the idea of diversification, we believe owning international stocks helps manage risk in long-term portfolios.