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According to Brazil, there is a "currrency war" ongoing around the world as countries seek to depress their currencies to enable them to export more to grow their way out of their economic malaise.

Financial Times points out that the US dollar has depreciated against the Brazilian real by 25% since the beginning of 2009.

Remember when Brazil was in hyper-inflation? Well, those day are history for now. The real is one of the strongest currencies out there, and it worries the authorities in Brazil. That proves, we suppose, that you can have too much of a good thing.

We think it is helpful when deciding where to invest internationally to be sensitive to and aware of important currency factors in performance relative to your home stock market in your home currency.

It is possible for the currency base of an foreign equity fund to reverse and to undo what might otherwise have seemed like a more fundamental success in that foreign stock market.

Consider these data as of today (September 27, 2010) for the MSCI Brazil stock maket index (the index tracked by EWZ) -- showing local currency total return first, then US dollar total return second:

  • 3 Months: 18.51 / 12.54
  • 1 Year: 17.53 / 11.82
  • 3 Years: 4.11 / 1.63
  • 5 Years: 22.48 / 19.17
  • 10 Years: 19.90 / 19.17

Now those are pretty good numbers whichever currency you express them in, but the currency effect is strong in the most recent time periods (and mild over the longer 10-year period).

If a Brazilian policy to weaken its currency to spur exports, for example, should be implemented and succeed, then there could be a substantial give back of the total return advantage that has built up so far.

This is not a prediction of any imminent change in currency values or the relative appeal of the Brazilian stock market. That market is simply a current high profile example of currency effects.

It's just one more thing to keep in mind when investing away from home.

Holdings Disclosure: As of September 27, 2010, we do not own any named security in any managed accounts.

Disclaimer: Opinions expressed in this material and our disclosed positions are as of September 27, 2010. Our opinions and positions may change as subsequent conditions vary. We are a fee-only investment advisor, and are compensated only by our clients. We do not sell securities, and do not receive any form of revenue or incentive from any source other than directly from clients. We are not affiliated with any securities dealer, any fund, any fund sponsor or any company issuer of any security. All of our published material is for informational purposes only, and is not personal investment advice to any specific person for any particular purpose. We utilize information sources that we believe to be reliable, but do not warrant the accuracy of those sources or our analysis. Past performance is no guarantee of future performance, and there is no guarantee that any forecast will come to pass. Do not rely solely on this material when making an investment decision. Other factors may be important too. Investment involves risks of loss of capital. Consider seeking professional advice before implementing your portfolio ideas.

Source: Be Aware of Currency Effects on International Funds