# Why is the USD considered a risky currency?

## Currency risk with mutual funds

### Under what conditions can currency risks exist?

The question is often asked whether there is a currency risk if the fund currency is in a foreign currency and not in euros. By the way, the fund currency is the currency in which the redemption price of a fund unit is stated.

To anticipate it: This question can be answered briefly with no, because whether a Currency risk exists or not, hangs solely on the securities contained in the fund and not from the fund currency. A fund quoted in euros may fool a beginner into a certain degree of security, but this turns out to be deceptive on closer inspection.
In the case of pension funds, however, one could get the idea of ​​answering the above question with yes. Bond funds are usually managed (for reasons of convenience or clarity?) In the same currency in which the bonds contained in the fund are also quoted.

### And that means in reverse:

If a bond fund is listed in a foreign fund currency, it will most likely also contain the corresponding foreign bonds. And foreign bonds carry a currency risk.
If, as a euro investor, you lend your money in a foreign currency and then exchange it back into euros at the end of the term, then you take a currency risk, because one cannot assume that the exchange rate of both exchanges will be exactly the same. However, the same risk would also exist if the fund currency of a foreign currency bond fund were denominated in euros. If they were quoted in euros, only the values ​​of the foreign bonds would be converted to euros using the current exchange rate - that would be all. The situation is similar for equity funds.

### Calculation of currency risk

As an extreme example, consider two international equity funds that each contain only two stocks: an American one worth 100 US dollars and a German one worth 200 EUR. Let's assume that both stocks remain stable in their local currency. The following fund assets would then result at an exchange rate of 1 US dollar = 2 euros:

 International fund (fund currency: US dollar) International fund (fund currency: euro) American share 100,- \$ 200,- € German share 100,- \$ 200,- € total 200,- \$ 400,- €

This means that at the current exchange rate of 2: 1, both funds would be worth exactly the same. If the dollar were to fall to 1 Euro, the following fund assets would result:

 International fund (fund currency: US dollar) International fund (fund currency: euro) American share 100,- \$ 100,- € German share 200,- \$ 200,- € total 300,- \$ 300,- €

Again, both funds would be worth the same at the current exchange rate of 1: 1. The euro fund would have lost value due to the weak dollar, which would be reflected in the lower price of the American share, while the US fund's German share would have become more expensive on a dollar basis and thus helped the US fund to increase in value on a dollar basis would have.

### Conclusion on currency risk

The Currency risk is not linked to the fund currencybut solely due to the fact that the prices of the securities contained in the fund are exposed to currency risk.

From this point of view, all bond and equity funds that contain bonds in foreign currencies or shares of foreign companies are subject to risk - regardless of whether the fund currency is in euros or in any other currency. And if you take it very carefully, you even take a currency risk when buying shares in a German company that is heavily dependent on exports, since when the dollar falls, profits on a euro basis also decrease, along with the market value of the individual share and, ultimately, the redemption price of the fund.

If you want to avoid a currency risk, one should only buy shares in euro bond funds or shares in equity funds that only invest in those German shares that are 100 percent dependent on the domestic market.

There is no difference at all between the US dollar fund and the euro fund. The only difference (if you will) is that with the US dollar fund you have to calculate the euro unit value yourself, while with the euro fund this work is done by the fund company.