Over the past year, the Euro has fallen by 15.65% against the dollar, from $1.19 per €1 last year to $1.0038 per €1 today. This is the lowest level the Euro has ever traded against the U.S. Dollar.
This historic decline has occurred for several reasons:
- Firstly, recession fears are higher in the Eurozone than in the U.S. Many analysts predict Russia will weaponize its gas exports to the EU in retaliation against aid sent to Ukraine. The EU relies on this fuel for industrial output, which could have devastating effects.
- Secondly, The European Central Bank (ECB) remains more dovish than the Federal Reserve concerning interest rate hikes. The higher rates available in the U.S. has led investors to abandon bonds of Eurozone countries in favor of U.S. Treasuries.
- Thirdly, the widening of the bond yields between Eurozone countries has caused some investors to lose confidence in the ECB’s ability to restore order soon. Investors have, in turn, bought up safe-haven currencies like the U.S. dollar.
Benefits for European investors in U.S. markets
If you invested in the U.S. markets last year, and are based in the Eurozone, then chances are some of your stocks have earned profit even if the share price has fallen, which is good news.
If you bought a share in a U.S. listed software company for $1.19 last July this would have cost you €1. The share price remains the same, but you sell it today. With the current conversion rate, this would give you around €1.19. If the company’s share price fell to $1.10 before you sold, you would still earn a return of €1.10 purely because the dollar strengthened.
Costs for European investors in U.S. markets
The issue is that investing in the U.S. markets is now more expensive for investors based in Eurozone countries. That same software company you invested in last year now costs €1.19, even though the share price never changed. The second risk is the potential strengthening of the Euro against the dollar over the coming months or years. This lowers the future returns for investors.
You buy a share in a mining company for $1, costing you roughly €1. If the Euro climbs to $1.10 over the coming months, your investment is worth €0.91 if the share price remains the same. Therefore, share price returns have to be higher to justify this investment.
A weakening/ strengthening Euro mainly raises risks in the short to medium term, which is why it is important to have a long-term outlook when investing. When buying and holding stocks for 10+ years, you lower your exposure to currency fluctuations.
Shane Vigna, Author at MyWallSt Blog