Handelsblatt editor Ulf Sommer explains the positive and negative effects of the rising euro.
Frankfurt The euro is rising and rising: since its low in early November, it has appreciated by six cents against the dollar, that’s a good six percent. Since last Thursday alone, it has increased by almost four cents. So Europe is currently attracting more money than the US.
The reason for this is likely to be the inflation rates in the USA, which have fallen again for the fourth month in a row. The somewhat declining inflation is fueling speculation on the financial markets that the US Federal Reserve (Fed) will not raise interest rates quite as sharply as originally assumed.
This in turn would mean that investments in the dollar area would lose some of their attractiveness compared to those in Europe – or to put it more positively: Europe would become a little more attractive in relation to the USA as far as interest rates are concerned.
The German stock market reacted positively to this constellation: The Dax continued to soar at the beginning of the new trading week. The leading German index ended trading on Monday 0.6 percent up at 14,313 points. That’s about 20 percent more than the low in early October. Wall Street in New York was slightly weaker two hours after the start of trading.
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Since the start of the small euro high flight at the end of September, the Dax has already risen by more than 1000 points or eight percent. This may come as a surprise at first glance, because the starting conditions for most companies in the euro area actually deteriorate with a rising euro. Their competitiveness is falling compared to American competitors given the weakening dollar.
What’s more, as soon as the companies convert and balance their income generated in the dollar area – and this includes America as well as large parts of Asia – into euros, the calculated profits are lower. A euro that has fallen by ten percent within a year increases the pre-tax profits of the Dax companies by more than ten billion euros, purely through the balance sheet conversion of currencies. Conversely, the same applies in the negative direction when the euro rises.
So there must be more important reasons that are driving the Dax up anyway. They exist: companies are still making a lot of money, as the current reporting season for the third quarter shows. The record profits of 2021 should be followed by almost as high 2022.
Whether Telekom, Allianz, Bayer or Linde: The large Dax companies have convinced with their nine-month balance sheets and have so far managed to deal with the many crises much better than previously feared. So far, neither rising prices nor the many supply chains that are still disrupted have been able to harm earnings – nor has the global economy slowed down.
Above all, however, the Dax is spurred on by the prospect of an end to the times when US interest rates are rising sharply. The central bank is still a long way from this, but the stock market likes to look far into the future: That is why investors are already counting on this effect.
Given these hopes, the negative profit effect of a suddenly rising euro will fizzle out. Incidentally, this also has its advantages for companies and consumers: it makes expensive raw material imports, which are almost always invoiced in dollars, cheaper by a few percent. And if commodity prices fall, then inflation in Europe will also weaken somewhat, which is also good news for consumers and the stock market.
More: The Dax is becoming more and more familiar