What is Currency Risk (and How Can U.S. Expats Manage It?)

Established expats know that the adventurousness that initially carried them abroad can often lead to new and foreign experiences, such as conversations around currency risk, and how to manage it as a U.S. expat.

Discussions about multi-currency investment portfolios are often borne of circumstantial changes or milestone events. To name a few examples, relocation to another country, the birth of a child, or an impending high school graduation can all trigger the need for financial reassessment with a cross-border twist.

While U.S. expats tend to know they should have questions about planning for these momentous events, it’s common for them to falter around the specifics. This is especially true if and when multiple countries and currencies factor into the equation.

The following article defines currency risk as it pertains to U.S. expats and outlines important considerations around multi-currency investing and portfolio management. This then sets the stage to note specific considerations for three popular countries for U.S. expats with very different financial planning implications for U.S. expats: Switzerland, Germany, and Portugal.

Defining currency risk for the U.S. expat based in Europe

Currency risk, also known as “FX risk,” refers to the inherent possibility that an owner of multiple currencies stands to lose some or a significant amount of money if their principal currency of use depreciates against their secondary currencies.

In the case of expats, their principal currency is typically the one used to pay bills, finance loans, pay for schooling, and otherwise weather major expenses. The Catch-22 is that an expat’s principal currency can change depending on factors such as their physical geographic location and investment priorities.

For many U.S. expats who live and work in Europe, currency risk is unavoidable

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U.S. citizens employed in, for example, Germany, on a local contract and paid in euros, automatically assume some level of currency risk. This is because while they are paid in euros, it’s possible that they have financial interests denominated in USD. This means that the impact of an appreciating euro may not be positive when it’s doing so against the greenback.

That said, there are many ways to mitigate this assumption of risk. For example, collaborating with a certified cross-border financial planner can help you unearth important questions that will guide you to the best financial planning solution for your situation. This holds true even when there are various gray areas. These can come into focus quickly (such as learning that you’re being transferred to another country) or stubbornly remain unclear (such as knowing that you’re going to be transferred to another country, but perhaps don’t know which one, yet).

Let’s illustrate this with an example

Imagine a young, married U.S. expat couple living and working in Germany. One partner is traditionally employed through a multinational company (i.e., paid in euros). The other is self-employed with clients predominantly based in the United States (i.e., paid in USD).

An opportunity arises for the traditionally employed partner to change locations and get a promotion. So, the couple decides to move to Switzerland. The move goes well and they settle in, purchase a home with a mortgage (in Swiss francs), and start a family. Both partners continue to work full-time, and the self-employed partner is still paid in USD.

At this point, the center of most of their financial interests (mortgage payments, childcare for their baby, and monthly bills) are denominated in Swiss francs. However, because one partner is not earning in Swiss francs, the couple must figure out how to maximize their earnings by strategically structuring their investment portfolio to account for the fact that their circumstances could change.

A circumstantial change could be that the traditionally employed partner is transferred or offered another opportunity elsewhere, or perhaps the couple decides they will move back to the U.S. before their child starts school.

In the latter scenario, there are various gray areas. But, one of the most important is the family’s decision to move back to the U.S. when the child starts school. This signals a fundamental shift in the denominational currency of a top priority (their child’s education) that also impacts other high priorities (where they live, the currency denomination of their mortgage, and others).

Save for later reading - US Expat Taxes: How to File from Abroad in 6 Simple Steps

The importance of striving to reconcile the benefits of living in Europe with an uncertain future geographic location

A European lifestyle and living costs are often much more sustainable on the surface. Work-life balance, rent control, and universal healthcare are just a few of the long list of benefits U.S. expats enjoy when they live in Europe.

And yet, many U.S. expats know that living in Europe will be only one or a few chapters in a well-traveled life that could well end up back in the States.

Therefore, a unique consideration (read: wrench) in financial planning efforts is the question of how to mitigate currency risk when an expat may not be entirely sure on which currency denomination their plan should be based.

The best way for investors to manage currency risk

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The bedrock on which a positive expat experience is built is communication: with yourself, your family, and, in many cases, your cross-border financial advisor(s).

While changes are a part of life and professionals exist to help you expertly navigate them, you can also proactively take steps to set yourself up for success.

Step one: In collaboration with a certified professional, ensure the strategic diversification of your assets between the currency denominations for which you will get the best return on your investment.

Step two: Ensure that your holdings are denominated in the target currency e.g., if you intend to retire in Portugal via Social Security distributions and investments banked in a U.S. brokerage, then you want to ensure your retirement portfolio is hedged against the depreciation of the U.S. dollar because USD is the currency in which your retirement distributions will be paid out.

Step three: Evaluate your holdings periodically so that you can assess whether your portfolio is fitting to your needs, or whether there are areas that can be better tailored.

Common international investment vehicles for U.S. expats

As you consider how best to match your investment denominations to your actual needs, your final determination will ultimately be expressed by your investment portfolio. Portfolio allocations are often distributed between the following:

  • Stocks and ETFs
  • Mutual funds
  • Bonds and CDs
  • Real estate
  • Gold and commodities

However, as an expat, there are ever-present U.S. tax filing tripwires to be wary of, most notably Passive Foreign Investment Companies (PFICs). (1) These are foreign investments that are unfavorably categorized by the IRS and thus punitively taxed.

Related reading: What is Net Investment Income Tax? (And Can Expats Avoid It?)

Staying clear-eyed when USD skepticism brews

Many U.S. expats develop misgivings over investing in USD-denominated assets out of an understandable fear that they will lose money on their investment.

This sentiment is especially common when U.S. political tensions arise and non-negotiables for a functioning government, such as a stagnant federal debt ceiling, get treated as negotiating chips.

Despite misgivings over the state of the U.S., it’s important to remember that the priority is to prepare as much as possible for your future reality. If that future involves USD-denominated priorities, then a declining greenback is less of a concern than the actual value your USD assets need to be in order to meet those priorities.

Crafting a multi-currency portfolio: Lessons from the field

It’s important for U.S. expats considering investing in non-USD-denominated assets to purchase from a U.S.-based brokerage. The reason for this is that the underlying asset and the exchange rate both factor into foreign currency investments, thus increasing the risk of the initial investment.

Some U.S. brokerages are known to be fickle when working with expats. Others, such as Charles Schwab and Interactive Brokers, have proven to be reliable for building an agile and globalized investment portfolio.

Although it’s challenging to manage currency risk, when it’s done well, U.S. expats with multi-currency investment portfolios may well come out ahead.

Related reading: 2024 US Tax Planning for Expats

Personalized wealth management: From one expat to another

Building an investment portfolio that can meet U.S. expats’ ever-evolving needs is a long-term endeavor that requires an open-minded approach and commitment to the steady build over short-term gains.

At Connected Financial Planning, we’re uniquely qualified to support U.S. expats for the long haul, thanks to our cross-border expertise and close client collaboration.

We are particularly adept at negotiating currency risk management for expats living in Europe. If you’re a U.S. expat looking to optimize your financial planning strategy for the long term, schedule a free consultation today.


  1. About Form 8621

Meet the Author

Arielle Tucker is a Certified Financial Planner™ and IRS Enrolled Agent with Connected Financial Planning. She’s spent over a decade working with US expats on US tax and financial planning issues. She is passionate about working with US expats and their families to help secure their financial future reflective of their core values. Arielle grew up in New York and has lived throughout the US, Germany, and Switzerland.