Effect of Exchange Rate Volatility on Portfolio Investment Decisions of U.S. Investors

Abstract

Purpose: The purpose of this article was to analyze the effect of exchange rate volatility on portfolio investment decisions of U.S. investors.

Materials and Methods: This study adopted a desk methodology. A desk study research design is commonly known as secondary data collection. This is basically collecting data from existing resources preferably because of its low cost advantage as compared to a field research. Our current study looked into already published studies and reports as the data was easily accessed through online journals and libraries.

Findings: Exchange rate volatility significantly affects U.S. investors’ portfolio decisions by influencing asset allocation, risk appetite, and hedging strategies. High currency fluctuations increase perceived investment risk, prompting shifts toward domestic assets or the use of hedging instruments such as forwards, options, and currency ETFs. Investors dynamically adjust international equity and bond holdings based on FX forecasts, balancing expected returns against currency-induced risk. Access to real-time analytics and predictive tools enhances portfolio resilience, though transaction costs and market inefficiencies can limit effectiveness. Overall, exchange rate movements are a critical determinant in U.S. investment strategy, requiring integration of FX risk into portfolio management and policy frameworks.

Unique Contribution to Theory, Practice and Policy: Modern Portfolio Theory (MPT), Complementing MPT and Portfolio-Balance Approach may be used to anchor future studies on the effect of exchange rate volatility on portfolio investment decisions of U.S. investors. Investment managers and individual U.S. investors should adopt structured and proactive strategies to manage currency risk. Policymakers and regulatory bodies should promote transparency and stability in foreign exchange markets to reduce systemic risks affecting cross-border investments.