Will a stronger euro ruin Europe's rally?

International investors have been buying into European stocks, driving the euro higher. But that surge now risks dampening the recovery that started it.

The euro has gained 8% against the US dollar this year. In response, European Central Bank (ECB) president Christine Lagarde has promised to “monitor carefully” developments in the foreign exchange market. 

A rising euro creates two problems: firstly, it means lower import prices. Eurozone consumer price inflation turned negative in August, so more deflationary pressure is unwelcome. Secondly, it hits the earnings of exporters, especially significant in a bloc where exports make up about 45% of GDP and bourses are crammed full of multinationals. 

Confidence in Europe’s economic recovery has encouraged international investors to buy into local markets, juicing the euro’s rally, says Jack Ewing in The New York Times. Ironically, that surge now risks dampening the recovery that started it. The ECB would prefer a weaker currency, but there is a tacit “non-aggression pact” between big central banks when it comes to exchange rates: actively talking down the euro would risk retaliation from Washington, sparking a self-defeating “currency war”. 

In any case, as Andrew Kenningham of Capital Economics points out, the current valuation is hardly eye-watering: the euro last traded at around $1.18 in 2018 and was as high as $1.38 back in 2014. The stronger euro will thus be a headwind, but it looks unlikely to sink eurozone stocks.

Recommended

Sterling crashes to its lowest since 1985 after mini-Budget
Currencies

Sterling crashes to its lowest since 1985 after mini-Budget

The pound has fallen hard and is heading towards parity with the US dollar. Saloni Sardana explains why, and what it means for the UK, for markets and…
23 Sep 2022
Earn 3.7% from the best savings accounts
Savings

Earn 3.7% from the best savings accounts

With inflation topping 10%, your savings won't keep pace with the rising cost of living. But you can at least slow the rate at which your money is los…
23 Sep 2022
Three top-notch Asian stocks to buy
Share tips

Three top-notch Asian stocks to buy

Professional investors Adrian Lim and Pruksa Iamthongthong, managers of the Asia Dragon Trust, pick three of their favourite Asian stocks to buy now.
23 Sep 2022
How to use Section 75 credit card protection for your purchases
Credit cards

How to use Section 75 credit card protection for your purchases

Your credit card can give you extra protection when the goods or services you purchase fall short of your expectations. Ruth Jackson-Kirby explains ho…
23 Sep 2022

Most Popular

Could gold be the basis for a new global currency?
Gold

Could gold be the basis for a new global currency?

Gold has always been the most reliable form of money. Now collaboration between China and Russia could lead to a new gold-backed means of exchange – g…
22 Sep 2022
Paypal, bitcoin, and the weaponisation of money
Bitcoin & crypto

Paypal, bitcoin, and the weaponisation of money

Recent events have shown how both business and governments can “weaponise” money and shut down dissent. What to do? Buy bitcoin, says Dominic Frisby.
22 Sep 2022
Why you should short this broadband satellite company
Trading

Why you should short this broadband satellite company

With an ill-considered business plan, broadband satellite company AST SpaceMobile is doomed to failure, says Matthew Partridge. Here's how to short th…
23 Sep 2022