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 consideration