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Usually relegated to the back-seat, currencies have become a hot topic in 2015, as volatility in the FX market has picked up. Anemic global growth and falling oil prices have created currency movements not seen in years. On March 5th, the dollar hit a 11 year high versus the euro when the European Central Bank announced that it would begin its own quantitative easing plan in the coming weeks. The dollar could continue to strengthen to levels not seen in decades as the US economy remains one of the few in the world with a steady pulse. The dollar’s sharp crescendo will inevitably create winners and losers. While a summer vacation to Europe may be more attractive, not everyone will benefit from a thriving dollar. Understanding currency risks will be vital for investors navigating the current global economy in search of returns.

Exchange Rates Thwarting Revenues

Last week, Hewlett-Packard Company (NYSE: HPQ) announced their annual earnings report on February 24th, and the numbers fell short of expectations. Both their revenue, at $26.8 billion, and earnings, at $1.37 billion, came up roughly $60 million short of Wall Street analyst estimates. Upon the announcement, HP’s stock dropped -5%. While remaining steadfast in her insistence that “the turnaround remains on track”, HP CEO Meg Whitman was forced to admit that the “currency challenge” will cause a greater impact in 2015 than originally predicted last quarter. HP suffered losses from currency translation as their costs and revenues were denominated in different currencies.

Source: Yahoo!Finance

Any US company with a significant foreign sales presence are particularly vulnerable to the dollar’s appreciation. Amazon projects that the current currency rates will wipe off 5% of its sales this quarter, while consumer goods conglomerate Proctor & Gamble predicted that a strengthening dollar will reduce its earnings by $1 billion.

The Disappearing Act: How Currency Movements Affect Investors’ Returns

What happened with HP was not that their sales were particularly bad, but that they had significant exposure to currency fluctuations. Currency risk is not limited to companies, but also affects normal day to day investors. Currency fluctuations can eat away at returns the same way they diminish a company’s revenue. If, for example, you buy a German stock and it appreciates +2% over the course of a year, but the euro depreciates -3% against the dollar in that same period, you will actually realize a -1.1% loss on your investment. So, how do you protect yourself from seeing gains on foreign investments get wiped out by a strengthened currency conversion? Hedging.