Shortly after his inauguration in January, US President Donald Trump declared that the strong dollar was “killing” the US, hurting exports by making them more expensive to foreign consumers.
Since then, Mr. Trump has gotten his wish: The euro has gained more than 8 percent in value against the dollar since the start of the year, rising to $1.1427 on Friday after European Central Bank President Mario Draghi signaled a possible adjustment in his central bank’s policy.
The euro’s strength does not appear to be having the effect Mr. Trump would have predicted though. In fact, European economies are gaining momentum despite the headwinds a strengthening currency can bring.
Michael Krautzberger, head of European bond business at BlackRock, the world’s largest asset manager, explained why this is the case. “Economic growth in Europe has picked up again; political risk premiums have fallen, particularly after the elections in France, and the euphoria, with regard to possible reforms under the new US government, is subsiding.”
Strategists see opportunities for investors in the euro zone, and are growing more skeptical with regard to US stocks.
The euro zone is proving resilient. Euro zone exports have fallen only slightly as the euro has strengthened, and European economies are expanding. This trend is reflected in European share prices. If you had invested €100,000 ($114,400) in the DAX index of Germany’s 30 leading shares at the beginning of this year, you would have made a profit of nearly €10,000, before transaction costs.
This rise shows that the stronger euro has not scared off international investors from European stocks – though, if they haven’t hedged their dollar investments with investments in euros, the currency fluctuation is eating into their profits. The euro has risen not only against the dollar, but also against many other currencies, gaining almost 3 percent against the British pound, nearly 6 percent in relation to the Chinese yuan, and 4.5 percent against the Japanese yen.
Currency fluctuations can often foil otherwise decent investment decisions. If you had invested €100,000 in US shares at the beginning of the year, you would have nearly broken even, despite the fact that the US benchmark index, the Dow Jones, has climbed 8.6 percent. The rise of around 8 percent in the price of gold, which is traded in dollars, is also wiped out when converted into euros.
“Investors who do their calculations in euros should be more cautious when it comes to investing in securities in foreign currencies,” said Mr. Krautzberger at Blackrock.
Despite currency risks, investors are tending to favor investments in the euro zone, particularly when it comes to the stock market, even as they become more cautious overall. “The air is becoming increasingly thin for shares, which are generally precursors of the economy,” said Markus Reinwand, an equity strategist at German bank, Landesbank Helaba. While political uncertainty has abated following the French election, the European Central Bank could cause upheaval if it announces that it will begin to phase out its stimulus measures.
Nevertheless, strategists see opportunities for investors in the euro zone, and are growing more skeptical with regard to US stocks. Euro investors have made particularly large profits so far this year in some smaller countries like Latvia and Greece, which recorded the strongest rises in the euro zone during the first half of the year. Economists expect the economy of Latvia, which only joined the euro zone in 2014, to grow by 3 percent this year, a faster clip than other euro zone countries. The same can’t be said of Greece: The country still hasn’t recovered from the sovereign debt crisis, and the Athens Composite Share Price Index is still well below the level it was 10 years ago. However, the latest agreement with its official creditors to release bail out funds is nevertheless regarded as an important boost. Rating agency, Moody’s, expects to see positive growth rates in Greece again this year following years of stagnation and recession.
Thomas Schüssler, joint head of equities business at Deutsche Asset Management, a subsidiary of Deutsche Bank, summed up investor sentiment with the phrase: “Everything except the United States.”
That’s partly due to the high valuations of US shares and partly due to political risk involving Mr. Trump.
Andrea Cünnen works at Handelsblatt’s finance desk in Frankfurt, reporting on bond markets. To contact the author: firstname.lastname@example.org