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Foreign Currency Exposure?
Old 07-24-2007, 08:15 PM   #1
Confused about dryer sheets
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Foreign Currency Exposure?

Can anyone help me understand why when investing overseas a dropping dollar would work against a US investor when invested in something?

In the following article it states "if the dollar weakens against other currencies, ... it reduces the value of US investors' foreign holdings".
RealEstateJournal | Foreign Real-Estate Funds Boom As Firms Introduce New Products

Here is how I would think this would work:
1) I spend $100 on 1 share of a Foreign REIT Mutual Fund
2) the dollar decreases in value so it costs me $101 to purchase 1 share of a Foreign REIT Mutual Fund
3) I sell my 1 share of a Foreign REIT Mutual Fund and recieve $101 (or something like that)

What am I missing?

Flat Broke

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Old 07-24-2007, 08:21 PM   #2
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Don't forget this is written by a real estate journal - they have an interest in getting you to invest in real estate.

If you curently own foreign denominated investments and the dollar falls your foreign denominated investment increases in value - all other variables remain constant.

Your #1 & 2 are the same "I spend" "it costs me to purchase"

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Old 07-24-2007, 08:39 PM   #3
Confused about dryer sheets
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For #1 I meant to say I purchased
For #2 I was trying to imply that the dollar falls so it costs me more to purchase a share

So you are on the same page with me that if the dollar falls & I own a foreign denominated investment I should see a gain. I'm not sure where the article is getting the idea that "it reduces the value of US investors' foreign holdings"
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Old 07-24-2007, 09:04 PM   #4
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An return on an unhedged foreign investment is 1 part (+/- on underlying asset) + 2 part (+/- currency value relative to the dollar in this case) = total gain/loss
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