Exchange rate exposure of firms diminishes when imported intermediates
and exports are denominated in currencies that move together. Appreciations
of the domestic currency, raising foreign currency export prices,
then also reduce marginal costs, allowing firms to counter the increase
in foreign prices. Using firm-level data from seven European countries
I estimate a structural model showing how exchange rate pass-through
into sales depends on intermediate imports and the co-movement of export
and import related exchange rates. I find that operational hedging
requires firms to intentionally choose export and import regions with comoving
currencies. Analyzing the locational choice of firms confirms that
the co-movement of currencies indeed appears to be taken into consideratio
