US Dollar exchange rate effect on Share Value

Scooby_Man

I have invested heavily in a US company.

My total share value is worth around £20k at the moment.

If the US dollar exchange rate increases, will the value of my holding total also increase??

Reaper

Yes, because when you come to sell and the proceeds are converted to sterling you will get a better exchange rate.

Of course it works against you if the dollar keeps falling.

Scooby_Man

Yes mate - just did a calculation

at present the rate is 0.56 - i changed it to 0.7 and OMG!!!! what a difference!

Rise rise rise!!!

Reaper

lol, yes it would! Your figures assume a 25% rise. Rather unlikely in the forseeable future I'm afraid.

deemy2004

I have invested heavily in a US company.

My total share value is worth around £20k at the moment.

If the US dollar exchange rate increases, will the value of my holding total also increase??

There is one variable that you are ignoring, and that is that the stock markets reflect movements in currencies.

I.e. if the dollar falls then the price of US stocks will rise relative to the price of UK stocks to take account of the fall in the $. Likewise if the $ rallies ! then US stocks will discount this rally in the dollar by marking US stocks lower relative to UK stocks.

SO A rally in dollar may not make much difference to the sterling value of your holdings as the market will mark the share price lower relative to where it would otherwise have been with no change in the dollar

Walletwatch

Currency fluctuations would actually affect different stocks differently, and to differing extents. For example, the dollar going down would mean good news for exports, so export-oriented company stocks would benefit. However, for mfg industries which rely on imports for most of their raw materials, and do not have indigenious alternatives would get hit.

Is there a specific macroeconomic factor you are referring to, when you say that ccy fluctuations are reflected on the stock markets?

deemy2004

Currency fluctuations would actually affect different stocks differently, and to differing extents. For example, the dollar going down would mean good news for exports, so export-oriented company stocks would benefit. However, for mfg industries which rely on imports for most of their raw materials, and do not have indigenious alternatives would get hit.

Is there a specific macroeconomic factor you are referring to, when you say that ccy fluctuations are reflected on the stock markets?

Hi

The original poster is talking about a rising dollar

Index and stock abitrage adjust stock prices relative to numerous events / indicators etc. of which currency movements is one very siginificant factor.

Others are interest rates, and the various economic stats.

Walletwatch

Hi

The original poster is talking about a rising dollar

Index and stock abitrage adjust stock prices relative to numerous events / indicators etc. of which currency movements is one very siginificant factor.

Others are interest rates, and the various economic stats.

Hi

The original poster has also mentioned investment in a specific company and not in an index as a whole. Hence, fundamental analysis matters, and one has to know what industry it falls under, what exposure it has to other currencies, etc. IMHO, one cannot determine the effect of ccy rate changes on the direction of price movement for such a stock without these details, let alone the extent.

The possibility of arbitrage self-corrects the stock-price only if stocks of such a company are quoted in multiple markets in different currencies.

deemy2004

Hi

The original poster has also mentioned investment in a specific company and not in an index as a whole. Hence, fundamental analysis matters, and one has to know what industry it falls under, what exposure it has to other currencies, etc. IMHO, one cannot determine the effect of ccy rate changes on the direction of price movement for such a stock without these details, let alone the extent.

The possibility of arbitrage self-corrects the stock-price only if stocks of such a company are quoted in multiple markets in different currencies.

The question was about a rise in $ exchange rate, effect on the sterling value, whereas you do have to take into account that the value of the asset will be adjusted for by the fact of a rising dollar , yes obviously we can spread the field wider by incorporating what the company does but it does not matter if its quoted on another exchange or not as the price of the stock would be adjusted relative to the stock market as a whole which is what happens with index abitrage.

I.e. when the stock market crashes as it did in 1987 driven down by index sell orders, it does not matter that your stock is part of the index or not, as it will be marked down also, same effect with movements in exchange rates.

Walletwatch

The question was about a rise in $ exchange rate, effect on the sterling value, whereas you do have to take into account that the value of the asset will be adjusted for by the fact of a rising dollar , yes obviously we can spread the field wider by incorporating what the company does but it does not matter if its quoted on another exchange or not as the price of the stock would be adjusted relative to the stock market as a whole which is what happens with index abitrage.

I.e. when the stock market crashes as it did in 1987 driven down by index sell orders, it does not matter that your stock is part of the index or not, as it will be marked down also, same effect with movements in exchange rates.

I think I get you here, Deemy. Just to clarify, what you mean is an interdependence between the equity and currency markets, just as the equity and interest rate markets are interdependent. i.e. if the dollar gets dearer versus the sterling, for the same investment amount, an investor may find himself in a position to take on more investment in the UK as compared to the US, demand-supply forces and the resultant self-correcting mechanism kicks in, which have an effect of reducing the price of the asset in the US to compensate for the effect of the change in exch rates.

Does this more or less reflect what you are referring to? If I've got it totally wrong, do explain.

Also, in either case, I think, as you suggest, the scope would need to be broadened to include fundamental analysis, especially since the original poster has exposure in a single stock and not in a diversified portfolio...

deemy2004

Yep, to both