How do exchange rates affect the value of foreign investments?

Exchange rates play a crucial role in determining the value of foreign investments and assets. When an investor holds investments denominated in a foreign currency, the variability of exchange rates can significantly impact the returns and overall worth of those investments.

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For instance, if an investor from the United States purchases assets in the Eurozone, any fluctuations in the USD-EUR exchange rate will directly affect the investor's returns. If the US dollar weakens against the euro, the value of the investments will increase when converted back to USD.

Central banks often monitor and manage the value of their domestic currency to maintain economic stability. One method they employ is adjusting interest rates, which can attract or repel foreign capital, thereby influencing the demand for and supply of their currency.

Additionally, central banks may intervene directly in foreign exchange markets by buying or selling their currency. This action aims to stabilize the exchange rate and prevent excessive volatility that could disrupt the economy.