FX basics — domestic vs. foreign assets

Money has prices in other moneys

You hold ₩1,000,000. How much is that in USD? Whatever the current exchange rate is — say 740 ₩/USD, so ₩1,000,000 ≈ $1,351. Tomorrow it might be 745 ₩/USD, and your same Korean money is worth $1,342. The won didn't buy or lose anything in Korea; it just shifted relative to the dollar.

That shifting is the foreign exchange (FX) market. Every currency has a price relative to every other currency, and those prices move continuously based on supply, demand, interest rates, trade flows, capital flows, and central bank actions.

For most retail investors, FX matters in two main ways: when investing internationally (foreign returns get re-translated to your home currency), and when traveling or buying foreign goods.

FX returns have two components

If you buy a US stock in your won-denominated account, your total return has two pieces:

1. The stock's return in USD (whatever the price did in dollar terms)
2. The currency return — how the won-USD rate moved during your holding period

So if the US stock gained 10% in USD but the won strengthened 5% against the dollar, your won-denominated return is roughly 10% − 5% = 5%. Conversely, if the won weakened 5%, your won return is roughly 10% + 5% = 15%. The currency component can either amplify or dampen your foreign returns.

This is why "international diversification" is more nuanced than just "buy foreign stocks." You're getting both stock exposure and currency exposure, and they may not move in your favor together.

Why FX rates move — the big drivers

Interest rate differentials. Capital chases yield. If US rates are 4% and Japanese rates are 0%, capital flows toward USD-denominated assets, strengthening the dollar. Interest rate parity is the formal name for this relationship.

Trade flows. A country exporting more than it imports needs foreign currency (to be paid for exports), which strengthens its currency. Persistent trade imbalances feed long-run FX trends.

Capital flows. Investors moving money in or out for FDI, portfolio investment, or carry trades. Often dwarf trade flows in size and speed.

Central bank actions. Direct intervention (buying/selling currency) or rate decisions affecting capital flows. Some countries actively manage their currency; others let it float.

Risk sentiment. In risk-off periods, investors flee to "safe haven" currencies (USD, JPY, CHF historically). In risk-on periods, capital flows back to higher-yielding emerging market currencies. This is why USD often strengthens during crises.

Hedging: choosing which exposures to keep

If you want stock exposure but not currency exposure, you can hedge the currency. Currency-hedged ETFs are a common retail product — they hold foreign stocks but use FX forwards or futures to neutralize currency moves. Returns are more "pure stock" but you give up the chance for currency tailwinds.

For most long-term diversified investors, currency exposure on foreign holdings is generally fine — over decades it averages out. For shorter horizons or for income (e.g., a retiree spending in won), unhedged currency exposure can be uncomfortable. There's no universal answer; depends on horizon, goals, and willingness to tolerate currency volatility.

The takeaway

FX rates set the price of one currency in another. They move continuously based on interest differentials, trade flows, capital flows, central bank actions, and risk sentiment. International investments come with both asset returns and currency returns — they can amplify or dampen each other. You can hedge currency exposure if you want pure asset exposure. Most long-term retail investors don't bother hedging because over long horizons it averages out, but the choice depends on your specifics.