Currency risk (Währungsrisiko)
Currency risk is the chance that a shift in exchange rates changes what a foreign-currency asset or income stream is worth in euros, independent of how that asset performs in its own currency. A US stock can rise in dollar terms and still lose euro value if the dollar weakens against the euro.
Why it matters
Anyone living in Germany but holding assets abroad — a US brokerage account, a Swiss pension, income invoiced in dollars — carries currency risk whether they notice it or not. It compounds with concentration risk (holding too much value in one asset, sector, or country): a portfolio heavy in one non-euro market is exposed both to that market's performance and to that market's currency, and the two risks can move together in a downturn rather than offsetting each other.
Currency risk is not inherently bad — it can also work in an investor's favor — but it is a source of volatility that many portfolios carry without deciding to. Recognizing it is the first step; whether and how to manage it (holding euro-denominated assets, currency-hedged funds, or simply accepting the swings) depends on the size of the foreign-currency position and the investor's time horizon.
Worked examples
1. A single foreign stock position. An investor buys shares of a US company for $1,000 when €1 = $1.10, so the euro cost is $1,000 / 1.10 ≈ €909. A year later the shares are still worth exactly $1,000 in dollar terms — flat performance — but the euro has strengthened to €1 = $1.20. Converting back: $1,000 / 1.20 ≈ €833. The stock did not lose value in dollars, but the euro-denominated value dropped by about €76, purely from the exchange-rate move.
2. Comparing euro and non-euro versions of the same idea.
| Scenario | Local-currency return | Exchange-rate move (illustrative) | Euro-terms return |
|---|---|---|---|
| Euro-denominated bond | +3% | none (already in euros) | +3% |
| Same return, US-dollar bond, dollar weakens 5% vs. euro | +3% | -5% | roughly -2% |
| Same return, US-dollar bond, dollar strengthens 5% vs. euro | +3% | +5% | roughly +8% |
The table uses an illustrative 5% currency swing to isolate the mechanism: the local-currency return and the exchange-rate move combine, and the exchange-rate component can add to or subtract from the underlying result. Over long holding periods, currency moves for major currency pairs have historically been more volatile in the short run than in the long run, but short-run swings are exactly what an investor with a near-term euro spending need has to live through.
Check yourself
An investor buys $1,000 of a US stock when €1 = $1.10 (euro cost ≈ €909). A year later the stock is still worth exactly $1,000, but the exchange rate has moved to €1 = $1.20. What is the position worth in euros now (round to the nearest euro)?
A euro-based investor holds a US-dollar bond that returns +3% in dollar terms over a year. During the same year, the dollar weakens by 5% against the euro. Roughly what does the investor see as the return in euro terms?
Which of the following statements about currency risk are correct? (Select all that apply.)