European ETF tied to the strength of the dollar?

[mtgordon]

I own the ETF VGK which is basically the European Index Fund. How is this tied to the American Dollar? For instance, let's say that the value of the dollar drops 50% overnight and everything else stays the same, does the value of the stock (in American dollars) go up 100% or stay stable?

Feel free to laugh at me as this is something that I should probably already know but I don't.

[The4Aces]

If the stocks are based in a currency other then the $ (which i think most european stocks would be) the price of the index fund would double... in terms of $.

[spider]

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For instance, let's say that the value of the dollar drops 50% overnight and everything else stays the same, does the value of the stock (in American dollars) go up 100% or stay stable?

[/ QUOTE ]

The doubling in USD makes sense to me as a first order effect. But I'd think that a lot of second order effects would reduce the effect. In particular, most Euro multi-nationals are going to have substantial assets in and earnings from the U.S. But I don't really have the slightest idea as to the magnitude of this effect.

[kimchi]

I think many international mutual funds have increased rapidly the last few years for US investors. This is partly due to weakening dollar.

I assume many funds in The US don't hedge their currency risk when investing in non $US denominated assets, which IMO will provide extra upside potential in the coming years.

[nicepair111]

Assuming the underlying securities of the fund's depositary receipts are not denominated in the US dollar, you will profit from the US dollar losing value to that currency because your securities will be worth more US dollars.

[dc_publius]

This is correct. When you invest in foreign stocks/ETFs, you take on both market and currency risk. I haven't looked at the numbers, but agree that the great returns you are seeing from EU are in part due to currency movements.

If you want to take away the currency risk, you will need to venture into Forex/currency trading.

[mtgordon]

I actually like the currency risk. People proclaiming that the dollar is going down the tubes and that you should invest in gold to hedge against this got me slightly worried. Then I realized that I was somewhat covered in case of a $ crash.