Currency Risk: The Invisible Movement in an Investment Portfolio

How to understand, measure, and manage exposure to the U.S. dollar

Currency risk is one of the least visible factors in a portfolio, yet one of the most decisive. Movements of the U.S. dollar or the euro against the Chilean peso can amplify or reduce returns, regardless of the underlying asset performance. In this newsletter, we review how currency exposure is measured, when it makes sense to hedge foreign currencies, the costs involved, and how to assess scenarios across CLP, USD, and EUR. A practical guide to understanding a risk that everyone has, but few manage consciously.

A strategic view of the dollar’s effect on portfolio construction and stability

Currency exposure refers to the portion of a portfolio whose valuation depends on movements between one currency and another. In Chile, this is primarily reflected in how USD/CLP or EUR/CLP fluctuations affect global assets. Holding a U.S. equity or bond implies two simultaneous sources of return: the asset’s performance and the exchange rate. As a result, even a well-diversified portfolio may exhibit higher-than-expected volatility if its exposure to the U.S. dollar is significant.

That said, once a portfolio is implemented in USD or EUR, the exchange rate is no longer the relevant variable for evaluating performance. From that point on, returns should be assessed in the portfolio’s base currency, focusing on the evolution of the underlying assets rather than fluctuations in the Chilean peso. Investing in hard currency is not a bet on the dollar or the euro, but a strategic decision to access a broader and more diversified investment universe. The objective is to build long-term wealth and returns, not to benchmark performance against short-term currency movements.

In practice, recent USD/CLP movements suggest that a balanced approach is often more effective: partially hedging when costs are low or when the goal is to stabilize returns, and maintaining exposure when the local environment is uncertain or when the U.S. dollar shows a structural upward trend.

Managing currency risk is not about predicting the dollar, but about understanding how it affects the portfolio’s trajectory and acting with discipline.