A strengthening euro currency may help encourage investors to look into European markets and stock exchange traded funds as the Eurozone economy begins its recovery process.
The Invesco CurrencyShares Euro Currency Trust (NYSEArca: FXE), which tracks the euro currency against the U.S. dollar, advanced 4.5% year-to-date while the euro currency gained more than 5% against the greenback in July, the biggest monthly gain since September 2010.
Meanwhile, the Vanguard FTSE Europe Index Fund ETF Shares (NYSEArca: VGK) is still 9.8% lower year-to-date and iShares MSCI Eurozone ETF (BATS: EZU) fell 9.4% so far this year.
While a stronger euro currency is seen as a negative for Europe’s large exporting industries, investors may instead focus on the improving outlook for the region.
“From a purely mechanical point of view, a stronger euro is bad for corporate profits in the export-driven industries, especially in Germany,” Berndt Maisch, a senior portfolio manager at Tresides Asset Management GmbH in Stuttgart, told Bloomberg. “But if the overlapping issue on the stock market is an increased confidence in the euro area, the positive effect outweighs.”
Both the Eurozone and U.S. economies have suffered from one of their worst economic slumps in the second quarter, but conditions in the U.S. continue to deteriorate with a resurgence in coronavirus cases while Europe has a better handle on quarantining the virus. Consequently, the diverging currency move reflects broad weakness in the dollar, a sign that the country is “losing its grip on the virus pandemic,” Maisch added.
Stefanie Holtze-Jen, DWS Group’s chief currency strategist, also belied that the argument of a strong euro is bad for euro assets doesn’t hold up if every region is struggling with stalling global trade. Consequently, negative implication for stocks is limited if there is a positive macroeconomic outlook.
“There are many myths on financial markets,” Day by Day strategist Valerie Gastaldy said in a note. “One of them is that a strong euro is a problem for European equities. This may sound logical, but it is definitely not confirmed by facts.”
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