Investing in foreign markets can be challenging due to exchange rate fluctuations. If you invest overseas, you may be wondering how much money you’re actually making. Here are a few quick tips to help you understand how exchange rates affect international investments:
- Understand How Exchange Rates Affect Investment Returns
Exchange rates are simply the price of one currency compared to another. For example, the U.S. dollar is worth 1.23 euros, but the euro is worth 0.86 dollars.
An investor tends to prefer currencies that are stronger than the dollar in general. Investors typically sell dollars when the dollar’s value rises and buy euros, yen, or other currencies instead. In contrast, investors typically sell dollars for other currencies and buy dollars when the dollar’s value falls.
Exchange rates are also considered by investors when deciding whether to invest abroad. Investors would want to avoid countries whose currencies are too weak in comparison to dollar.
- Consider Currency Risk Before Investing Overseas
It is important to understand the risks involved with investing overseas before making a decision. Currency risk is one of the risks.
As the value of a country’s currency declines, the purchasing power of its citizens decreases, leading to currency risk. The purchasing power of its citizens increases as the currency’s value increases.
Political risk is another type of currency risk. Changing government policies can lead to political instability, which can reduce the value of a nation’s currency.
- Know Which Countries Have Strong Currencies
The following indicators can help you determine which countries have strong currencies:
- • GDP per capita
- • Unemployment rate
- • Trade deficit
- • Current account balance
- Avoid Weak-Currencies Markets
When choosing an investment market, don’t choose a country with a weak currency. A weak currency will make it more expensive for your company to do business there.
- Choose Stable Economies
Consider investing in a market with a stable economy if you intend to stay invested for several years. In this way, short-term economic fluctuations won’t affect your investment’s return.
- Look At the Long Term
If you’re planning on holding onto your investment for five years or longer, you should consider choosing a developed country with a high level of stability. Developed countries like Japan, Germany, France, Switzerland, Sweden, Norway, and Finland all offer long-term growth potential.
- Consider Your Goals
You might want to consider investing in a developing country where inflation is low if you’re hoping to retire early. A lower inflation rate means you’ll have more spending money later in life since inflation erodes the value of your savings.