Currency exposure refers to the risk that changes in foreign exchange rates will negatively impact the value of investments or business operations denominated in foreign currencies. This risk is particularly relevant for international investors and companies engaged in global trade.
For example, if a US investor holds European stocks and the euro weakens against the dollar, the value of those investments decreases when converted back to dollars — even if the stock prices remained unchanged in euro terms.
Investors can manage currency exposure through hedging strategies such as currency forwards, options, or currency-hedged ETFs. Understanding currency exposure is essential for anyone investing internationally or doing business across borders.