Final answer:
The performance of an international bond fund will be negatively affected if the U.S. Dollar increases in value or if the foreign currency decreases. A stronger U.S. Dollar can make foreign investments more expensive and diminish returns, similar to the effect on U.S. importers.
Step-by-step explanation:
An investor has purchased shares of an international bond fund.
The performance of the fund will be inferior if the value of the U.S. Dollar increases or if the foreign currency decreases. When the U.S. Dollar increases in value, a U.S. investor purchasing foreign assets would find them more expensive. Conversely, if the foreign currency decreases, that also effectively makes the investment more costly because it lowers the value of the foreign assets when converted back into U.S. dollars.
This situation is analogous to a U.S. importer, where a weaker dollar translates to an increased "price" of investment due to obtaining less foreign currency with the same amount of dollars. This implies a potential decrease in U.S. investment abroad. In investing terms, a strong dollar can diminish the returns on international investments because the revenue generated in foreign currency will convert into fewer dollars.
Contrastingly, if the U.S. dollar decreases in value or the foreign currency increases, then the international bond fund might perform better, as the foreign investment becomes more valuable in dollar terms.