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Does a weaker dollar effect my investment performance in international index funds?

When you're investing in international markets, you're actually investing "twice" - once in the stock/bond/etc, and once in the exchange rate. During the purchase, your US dollar is first converted to the foreign currency (so in the case of the dollar being weaker than the foreign currency, you are losing a little money), then the foreign currency is used to purchase the security. When you sell, you're performing the same two tasks in reverse - selling the security for foreign currency, then converting it back at the new exchange price at the time. The process gets tricky because you need to be on top of both the value of the securities you hold in foreign funds, as well as the current exchange rates to determine if your investment is performing the way you'd like. It's highly probable that the investment itself could be performing well, but a weakening dollar could cause all that performance to be lost in the exchange.

I'd recommend, if you're going to invest in a foreign security, that you decide beforehand to make it a long-term investment. Otherwise, it's safer to either invest in local securities, or in foreign currency - both of which only use one of the two factors I described above to gauge performance.

Stephen has the concept right, but the result wrong. As the dollar weakens, the foreign stock becomes worth more dollars; for example if you bought a dutch stock worth one euro when the euro was 1 to 1 with the dollar, it cost you one dollar. If the dollar weakens to 1.2 euros, and you sell the stock (unchanged in local euro price at one euro) you get $1.20 for the sale. All of your return is currency return in this example.
Given our current trade deficit and budget deficit, foreign stocks (I prefer ADRs) look comparatively attractive to me at present, and I own a number of them.
A weaker dollar would boost returns of your foreign stock funds, as long as the fund was not "hedged" for currency exchange.

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