The sharp rise of the euro this year is regarded by investors as a vote of confidence in the prospects of European economic recovery. But the company and its shareholders are preparing for the pain.
The exchange rate of the euro against the dollar has risen by 5.6% this year, the largest increase since 2017. On September 1, the exchange rate of the euro against the U.S. dollar exceeded $1.20 for the first time since May 2018. In terms of trade-weighted exchange rates, the currency is close to historical highs. This means that the euro has also strengthened against the currencies of other major trading partners, including China and the United Kingdom.
After the euro strengthens, exports of machinery, automobiles, and chemical products in the euro zone will become more expensive for foreign buyers. This has also eroded the value of overseas sales of companies in the 19 member states and may eat into profits just as they emerge from the new crown economic crisis.
Viragi Patel, foreign exchange and global exchange strategist at research firm Arkera, said: “When I saw the trade-weighted index, we were at the beginning of a painful threshold. If the euro exchange rate appreciation stops here, it is still a small problem. . If the euro price continues to rise, big problems will arise.”
The rise of the euro reflects the weakness of the dollar. The Federal Reserve has hinted that it will keep interest rates low and allow inflation to rise. In recent months, investors have stopped holding U.S. dollars. This has reduced the value of the dollar by 3.7% this year.
Analysts said that the strengthening of the euro has not yet put much pressure on European stock markets, but this is one of the reasons why the regional stock indexes lag behind the US stock indexes. The Stoxx Europe index has fallen by about 10.6% this year, while the S&P 500 has risen by 6%.
Analysts said that the real impact of currency appreciation will begin to appear on the company’s bottom line.
However, it is difficult to quantify how much the appreciation of the euro will have on company earnings. According to Wolfgang Koster, a senior strategist at financial software company Kyriba, companies with revenues of more than $250 million usually trade in 40 currencies and more than 200 cross currencies.
Coster said: “People tend to balance what’s happening between the United States and Europe, but in reality, it’s more complicated than that.”