International investing can produce a strange result: a stock market may rise strongly in its home country while a foreign investor barely makes money – or even loses it.

The missing piece is often the currency.

When you buy shares outside your home market, you are usually exposed to two return drivers at the same time. First, there is the performance of the underlying stocks. Second, there is the movement of the foreign currency against your own.

That is why understanding how currency fluctuations influence international equity returns matters when comparing global investments. A 10% gain in European stocks does not automatically mean a 10% return for a U.S., Japanese, or Indonesian investor.

CFA Institute notes that foreign-currency investments introduce an additional source of return and risk because exchange-rate movements can materially affect portfolio results over short and medium horizons.

Currency can boost international returns, reduce them, or occasionally overwhelm the underlying stock-market performance entirely.

International Equity Returns Have Two Main Components

The easiest way to understand foreign-stock performance is to separate the investment into two pieces.

The first is the local equity return.

If a German stock rises from €100 to €110, the local-market return is 10%, ignoring dividends.

The second component is the exchange-rate movement between the euro and the investor’s home currency.

For a foreign investor, those two effects combine to determine the final home-currency return.

CFA Institute explains that investors ultimately care about returns measured in their own currency. For a foreign asset, that means considering both the asset’s nominal return and changes in the exchange rate.

This distinction explains why financial websites sometimes show very different performance numbers for the same international market depending on the currency used.

A Simple Example Shows How Big the Difference Can Be

Imagine a U.S. investor puts $10,000 into European equities.

Over the next year, the European market rises 12% in euro terms.

If the exchange rate remains unchanged, the investor’s return is roughly 12%.

Now suppose the euro also appreciates 8% against the dollar.

The investor benefits from both the stock-market gain and the stronger foreign currency. Using the combined-return relationship, the result would be approximately:

(1.12 × 1.08) − 1 = 20.96%

So a 12% local-market return becomes almost 21% for the dollar-based investor.

But reverse the currency movement.

If the euro falls 8% instead, the approximate return becomes:

(1.12 × 0.92) − 1 = 3.04%

The stock market still performed well, but most of the gain disappeared after currency translation.

MSCI notes that adverse exchange-rate movements can dramatically alter the performance experienced by international investors.

That is why comparing only local index returns can create a misleading picture.

A Strong Home Currency Can Hurt Foreign Equity Returns

For an unhedged investor, a strengthening home currency generally reduces the value of foreign investments after translation.

Consider a U.S. investor holding Japanese stocks.

If the Japanese market gains 15% but the yen weakens sharply against the dollar, the investor’s dollar return may be much lower than 15%.

A weaker home currency produces the opposite effect.

Vanguard provided a useful real-world example from the first half of 2025. International equities returned approximately 8.8% in local currencies, but about 17.9% in U.S. dollar terms as dollar weakness added roughly nine percentage points to performance.

That is a huge difference created largely by FX translation.

Currency cycles can therefore make international equities look unusually strong or weak even when the underlying companies have not experienced equally dramatic changes in earnings.

This is also why investors should be careful when extrapolating recent international performance. Part of a strong return may come from a curency tailwind that will not necessarily continue.

Currency Moves Also Affect the Companies Themselves

Exchange rates do more than change an investor’s translated return.

They can also affect the businesses inside an international equity portfolio.

Imagine a Japanese manufacturer that sells a large percentage of its products in the United States.

If the yen weakens against the dollar, each dollar of U.S. revenue translates into more yen when the company reports its results domestically.

That can support revenue and profits.

Export-oriented companies sometimes benefit from weaker domestic currencies for this reason.

The opposite can happen for companies heavily dependent on imported materials. A weak domestic currency may make imported energy, equipment, or raw materials more expensive.

Multinational companies create another layer of complexity.

A company listed in France might generate only 20% of its sales in France, with the rest coming from the U.S., Asia, and other markets. Its true currency exposue therefore depends more on where it earns revenue and incurs costs than on where its shares happen to be listed.

Investors should look beyond the country label and consider the geographic composition of corporate revenues.

Currency Hedging Can Reduce FX Exposure

Investors who do not want exchange-rate movements dominating international returns can use currency hedging.

A hedge typically uses instruments such as currency forwards to offset some or all of the portfolio’s foreign-exchange exposure.

Suppose an investor owns European stocks but hedges the euro exposure back into dollars.

If European shares rise 10% while the euro falls sharply, the hedge can offset much of the currency loss, allowing the investment return to more closely resemble the local equity performance.

MSCI found that currency hedging reduced risk and increased returns for U.S.-based investors across several international markets during the period it studied from 2010 through June 2024.

However, the effect was not universal; hedging Japanese equities, for example, increased risk in its analysis.

That last point matters.

Hedging is not automatically better.

It reduces one source of uncertainty, but it can also remove favorable currency moves and introduce hedging costs.

Full Hedging Is Not Always the Best Answer

Investors often approach currency exposure as a binary decision: hedge everything or hedge nothing.

In reality, partial hedging is possible.

An investor could hedge 25%, 50%, or 75% of the foreign-currency position depending on risk tolerance and investment objectives.

CFA Institute research has long explored the idea that the optimal hedge ratio may be below 100% because some currency exposure can contribute to portfolio diversification.

More recent MSCI research also emphasizes that no single hedge ratio works perfectly across all investors and currencies. The impact depends on the relationship between equity-market returns, FX movements, portfolio objectives, and the investor’s home currency.

Hedging costs matter too.

Interest-rate differences between countries influence forward currency pricing. When those differences become large, maintaining a hedge can either create a cost or benefit depending on the currency pair.

The practical question is therefore not simply, “Will this currency rise?”

A better question is, “How much currency volatilty do I want contributing to my total portfolio risk?”

Currency Exposure Can Improve Diversification

Foreign-exchange volatility is not always harmful.

Sometimes currencies move in ways that reduce overall portfolio risk.

For example, a foreign currency might strengthen precisely when an investor’s domestic equity market performs poorly. In that situation, the currency position can provide an additional source of diversification.

Vanguard has argued that accepting currency risk in international equity allocations can reduce the correlation between domestic and international stock returns and may provide some protection against domestic inflation risk.

This is one reason the treatment of currency risk can differ between stocks and bonds.

Equity volatility is already relatively high, so FX movements may represent a smaller proportion of overall risk.

Bonds usually have much lower underlying volatility. Leaving foreign-bond currency exposure completely unhedged can therefore allow exchange-rate fluctuations to dominate the investment.

The appropriate currency strategy should consequently depend on the asset class rather than applying one rule to an entire global portfolio.

Emerging-Market Currencies Can Create Larger Swings

Currency effects become particularly important in emerging markets.

Emerging-market currencies can sometimes experience much larger movements than major developed-market currencies because of inflation, political uncertainty, commodity prices, foreign capital flows, or central-bank policy.

Imagine an emerging-market stock index rises 20% in local currency.

That sounds excellent.

But if the currency falls 25% against the investor’s home currency, the foreign investor can still suffer a loss.

Using the same return calculation:

(1.20 × 0.75) − 1 = -10%

A 20% equity gain has become a 10% loss.

Currency depreciation can also affect local companies with significant foreign-currency debt, increasing their debt-service burden and potentially weakening profitability.

Vanguard identifies currency risk as one of the major additional risks involved in investing outside a home market, alongside regional and emerging-market risks.

This does not mean emerging markets should automatically be avoided. It means investors need to understand how much of the expected return depends on stable exchange rates.

Currency Forecasting Is Harder Than It Looks

It can be tempting to solve the FX problem by forecasting currencies.

Unfortunately, exchange rates are notoriously difficult to predict consistently.

They respond to interest-rate expectations, inflation, capital flows, trade balances, government policy, economic growth, risk sentiment, and countless unexpected events.

CFA Institute describes exchange-rate forecasting as particularly difficult over short horizons and notes that even widely used valuation concepts such as purchasing power parity tend to be more useful over longer periods than for short-term predictions.

That suggests investors should avoid making an entire international equity allocation depend on one currency forecast.

A more practical approach is to understand the existing exposure, decide how much FX risk is acceptable, and then use diversification or hedging when needed.

Trying to predict every currency turn can easily transform a long-term equity strategy into a short-term macro trading strategy.

Focus on Total Return, Not Just the Foreign Stock Market

The most important habit for international investors is evaluating performance in their actual home currency.

A foreign market may be booming while your personal investment return remains disappointing.

The opposite can also happen.

Weak local-market performance can be softened by favorable exchange-rate movements.

Investors should therefore separate international returns into local equity performance and currency impact whenever possible.

This makes it easier to understand whether results came from corporate fundamentals, valuation changes, or FX movements.

It also prevents investors from blaming a foreign stock strategy for something that was primarily a currency event.

Over time, the relationship can change dramatically. MSCI research shows that both the risk and return effects of hedging are regime dependent rather than permanently favorable in one direction.

For long-term investors, that makes diversification and disciplined currency management more useful than attempting to perfectly time foreign-exchange markets.

Currency fluctuations can significantly change the returns international equity investors actually experience.

A strong foreign currency can amplify gains, while depreciation can reduce – or completely erase – positive local stock-market performance.

Exchange rates also influence multinational company earnings, import costs, competitiveness, and foreign debt, meaning currency effects operate at both the investor and corporate levels.

Hedging can reduce unwanted FX risk, but full hedging is not automatically the best solution. Costs, diversification benefits, home currency, and investment horizon all matter.

Before evaluating an international stock allocation, separate the local-market return from the currency contribution. Then decide whether that FX exposure supports your diversification goals or adds more uncertainty than you are comfortable accepting.

Understanding both components makes global equity performance much easier to interpret – and helps prevent exchange-rate movements from becoming an unexpected surprise.