From Morningstar: 2024-06-07 12:47:00

The European Central Bank has cut rates, prompting expectations of a weaker euro compared to the US dollar. This could benefit investors in foreign currency-denominated assets, leading to improved returns and enhanced competitiveness for Eurozone companies.

With a potential divergence in monetary policy between the US Federal Reserve and the ECB, the euro may face depreciation against the dollar. Asynchronous cuts by central banks could impact currency values, potentially stimulating exports and offering attractive entry points for European equities compared to US counterparts.

Currency fluctuations can significantly impact the value of assets. Appreciation of a foreign currency can boost returns on foreign assets, while a strengthening local currency can have a negative effect. Investors should consider hedging against currency risk to mitigate fluctuations, as evidenced by the varying performances of different index funds.

Hedging against currency risk aims to reduce exposure to fluctuations, but it comes with additional costs and may not be perfect. Forward contracts are commonly used for hedging, but they introduce the “rolling effect” that can impact returns. Investors must consider their investing horizon and evaluate whether hedging is worth it based on their goals and risk tolerance.

For most retail investors, the unhedged option may be the simplest choice, especially when investing in global funds with exposure to multiple currencies. While currency fluctuations can add to volatility and impact short-term returns, they generally have a muted effect on long-term investment performance. Hedging decisions should align with an investor’s overall financial strategy and goals.



Read more at Morningstar: As the ECB Cuts Rates, Investors Need to Prepare…