Bonds

The Federal Reserve’s Joseph E. Gagnon said that exchange rate depreciation could push up domestic inflation through higher import prices. Investors would require higher returns to compensate for the inflation and would expect the Fed to raise interest rates to fight off inflation, which would push up interest rates even more. Given the inverse relationship between bond prices and interest rates, a currency crash, which is a rapid fall in the currency, could also lead to a bond market crash.

Mutual Funds

The Royal Bank of Canada Global Asset Management website describes the impact of foreign exchange depreciation and devaluation on Canadian mutual funds holding U.S. and other foreign stocks. However, the concept applies equally to U.S. mutual funds holding European stocks or European mutual funds holding Japanese stocks. For example, if the Canadian dollar or the euro were to fall, the value of Canadian and European investments held by U.S. mutual funds would decline. However, the currency-related impact is minimal over the long term.

References

Resources

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