If you invest in U.S. companies to avoid currency risk, you might be in for a surprise. For example, suppose you own stock in a company that manufactures jackets, which it sells for $100. Its major competitor is an overseas company that imports similar jackets, which sell for the same price.
If the dollar gains 10% in value in relation to the importer’s currency, the importer can reduce the selling price of its jackets because it can cover the cost of manufacturing and shipping with fewer dollars. That’s because each dollar the importer takes back to its own country equals a larger amount of the importer’s currency than it did before. Suppose, for example, the importer can make a profit if it sells its jackets for $90. Customers, eager to save money, will buy the imported jackets, eating into the sales and the earnings of your company.
Unless it could find a way to cut costs, or persuade the government to tax imports, your company would be in real danger of losing market share and potentially going out of business.
