I provide a novel channel through which real exchange rate (RER) shocks affect sales and short-term investment of U.S. firms with international activities. Using a novel identification strategy that compares how a similar firm responds to shocks differently when they are initiated in their most profitable quarter ("main quarter"), I show that RER shocks are amplified by funding constraints that limit working capital financing. Specifically, a positive RER shock (RER depreciation) initiated in the main quarter increases production costs and decreases internal funds allocated to short-term investments of constrained importing firms, reducing firms' sales and production capacity. While the working capital channel is relevant for importing firms, it is not present for exporting firms since those firms are not exposed to changes in production cost after an RER shock.
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