The FTSE 100 is London’s best-known share index, but a large part of the profit its companies make is earned outside the UK. Oil majors, miners, drugmakers and consumer goods giants sell around the world, often in US dollars. When those profits are reported in pounds, exchange rates change the numbers. This effect is called currency translation, and it can make UK company results look better or worse than the underlying business deserves.
What currency translation means
Suppose a UK-listed company earns 100 million dollars of profit in the US. To report its results, it converts that figure into pounds. If the exchange rate is $1.25 per pound, that profit is worth 80 million pounds. If the pound strengthens to $1.35, the same 100 million dollars is worth only about 74 million pounds. Nothing has changed in the US business, but reported profit has fallen by around 7.5 per cent.
The opposite happens when sterling weakens. Overseas profits are worth more in pounds, and reported earnings get a lift.
Why this matters for the FTSE 100
Because so much FTSE 100 profit comes from abroad, the index often moves in the opposite direction to sterling. A falling pound tends to support the index, while a rising pound can weigh on it. This is one reason the FTSE 100 sometimes behaves very differently from the UK economy. Our guide to what a weak dollar means for UK investors looks at this from the investor’s side.
The FTSE 250, which contains more companies focused on the UK, is usually less sensitive to currency translation and more sensitive to the health of the domestic economy.
Translation versus transaction effects
It helps to separate two effects. Translation is about converting overseas profits into pounds for reporting. Transaction effects are about real costs and revenues, for example a UK manufacturer buying parts priced in dollars or selling goods abroad. A weaker pound can raise import costs while boosting export competitiveness. Both effects matter, but translation is the one that shows up most directly in headline earnings.
How companies report it
Many companies give a figure for growth at “constant currency”, which strips out exchange rate moves. Comparing reported growth with constant currency growth tells you how much of a change came from the business and how much from currency. When reading results, it is worth checking both. A company reporting falling profits may actually be growing steadily once currency effects are removed.
What traders watch
Traders keep an eye on sterling against the dollar when thinking about the FTSE 100. A sharp rise in the pound, like the move after the 2026 US midterms covered in our Morning Market Brief, can be a headwind for the index’s big international earners. Over time, though, company performance, interest rates and commodity prices usually matter more.
The beginner’s takeaway
Currency translation means exchange rates can change reported profits without changing the business. For FTSE 100 investors, a stronger pound can dent results and a weaker pound can flatter them. Looking at constant currency figures helps you see what is really going on.
Reading results with this kind of care is a valuable skill. To see how your own analysis measures up, take the free Samuel & Co Trading Trader Assessment.
