Conventional wisdom has it that increasing price or exchange rate uncertainty will depress investment. Using the Dixit-Pindyck model, we find that there are situations where this will happen; and situations where it does not. There are threshold effects which allows us to identify when rising volatility would increase or decrease investment; and also to identify which types of industries would gain, and which would suffer, from a move to fixed exchange rates. This is important for monetary union in Europe since it is likely that, even if trade is insensitive to exchange rate volatility, investment with its longer horizon will be affected. Textbook theories of investment under uncertainty present a rather oversimplified rule for a firm deciding whether to invest or not. If the project's expected net present value (NPV) is positive, the firm invests; otherwise it does not. This implies that if the investment is reversible, the firm will simply disinvest if the NPV turns negative. But if investment is irreversible, then if a firm decides not to invest, it will never invest. This is not a realistic approach. Given uncertainty, firms often find it convenient to wait rather than to commit themselves one way or another. Waiting is therefore a proper alternative to investing or not investing; and firms will be confronted with an 'invest-wait-do not invest' decision, rather than an 'invest-do not invest' one. Dixit and Pindyck (1994) have developed a model in which the option value of an investment project is evaluated to represent the value of waiting. That option value then becomes part of the investment costs because, once an irreversible investment is made, the possibility of exercising this option to invest later on, when better information is available, has been lost. Thus the decision rule is still 'invest if NPV> 0, otherwise do not invest', but the NPV now represents the present value of the expected revenues, less the value of the option to invest later, less the present value of any other investment costs. In this paper we extend the Dixit-Pindyck model for varying degrees of uncertainty and price drift, and specifically for the case where that uncertainty is caused by exchange rate volatility. Such an extension is important, not only because it is a new development, but also because we need to understand how monetary union will affect investment expenditures in Europe. For simplicity we assume the domestic prices are fixed, and that the only uncertainty is in the exchange rate and hence the domestic value of foreign currency revenues. That leaves us with various problems. The first is to determine the threshold at which exchange rate/price uncertainty is sufficient to affect investment adversely. Second, under what conditions does that uncertainty actually reduce investment? Third, do exchange rate misalignments or exchange rate volatility damage investment more? We show that answers to such questions can be [C55]