“Remember those 14-year highs” in the dollar index? “No, nor does anyone else,” says Katie Martin in the Financial Times. Soggy inflation in the US has put back the expected timetable of further US interest-rate hikes, and Donald Trump’s inability to get anything done has also tempered enthusiasm for the greenback. The talk of the forex market is now the euro. It has climbed to a two-year peak against the US dollar. The euro index, which tracks it against a basket of trading partners’ currencies, is also at a two-year high.
Could the euro dent the European stockmarket rally? The eurozone relies more on exports than Britain or America, which are relatively closed economies, so a higher euro could undermine growth by making exports more expensive and will also reduce the value of foreign earnings. But the currency jitters look overdone.
For one thing, the currency is just one factor determining the earnings outlook, not the key one. A weak euro “did not save Europe from a six-year profit malaise” in the early part of this decade, as Karen Olney of UBS told the FT. So we shouldn’t expect a stronger one to be pivotal either. On that subject, it isn’t actually that strong anyway after years of decline. The euro index is still miles off its 2008 peak.
And just as German exporters in particular shrugged off a strong Deutschmark in the 1970s and 1990s, so Europe’s firms seem confident they can keep thriving now. An index gauging sentiment among German exporters has hit its highest level since 2011, says WirtschaftsWoche. Not only have they been able to compete on quality in the past, but the European and global economy is picking up, currently more than offsetting the headwind from a stronger currency. According to Deutsche Bank, the International Monetary Fund “sounded uncharacteristically certain” last month that global growth was gathering steam. “There is now no question mark over the… gain in momentum.” Eurozone corporate profits have also risen strongly of late.
In the meantime, European Central Bank president Mario Draghi appears to be in no hurry to remove his money-printing stimulus, while valuations remain reasonable, especially compared with the US. Another bullish factor is that “Europe’s banks are finally stabilising”, says The Wall Street Journal. “Grinding restructuring is starting to pay off.” It’s been a long trek, but investors’ focus is now on profitability, rather than capital cushions and bad loans. The encouraging backdrop suggests Europe’s rally will endure.