Reuters

(Reuters)

The Ailing Euro hits an 11-Year Low - Implications for US Investors and Consumers

Investing Basics

After steadily falling in value against the U.S. dollar for most of 2014, the euro plunged to a new low in late January upon the announcement that the European Central Bank (ECB) will start a bond-buying program this year that will be similar to the Federal Reserve’s recently concluded Quantitative Easing (QE) program.

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When the announcement was made on January 22, the euro fell by more than two percent against the U.S. dollar to about $1.14, hitting an 11-year low. This means that one euro will buy $1.14 in U.S. currency. Alternatively, $1.00 in U.S. currency will buy 0.86 euros.

For comparison’s sake, when the euro was first launched in 1999, the value of the euro against the U.S. dollar was 1.00 euro to $1.17. It fell to as low as $0.85 to one euro in 2001 and rose to as high as $1.59 to one euro in 2008. As recently as last April, the value of the euro against the dollar was one euro to $1.38.

Some analysts believe this could just be the start of a further plunge in the value of the euro against the U.S. dollar. Many expect the euro to keep falling during the early part of this year, possibly even reaching parity with the dollar in the coming months.

What Does It Mean?

So what does a falling euro mean for consumers and investors in the U.S.? In theory, goods imported into this country from Eurozone nations will cost U.S. consumers less. In reality, though, it usually is not that simple. This is because Americans in general do not buy a lot of mass-produced goods from Eurozone nations.

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Instead, most of what is imported into the U.S. from Europe is high-end products, including fine wines and expensive fashion items like designer clothing, Swiss watches and Gucci handbags. Conversely, most of the mass-produced goods imported into the U.S. (such as clothing and furniture) come from places like China and Central America.

The U.S. economy is doing well compared to most other countries right now, as are upper income and wealthy American families. These consumers are generally willing to pay high prices for upmarket goods, so demand remains high and manufacturers in Europe do not feel like they need to reduce prices. Instead, most of them will pocket the savings that result from the euro’s decline, thus increasing their profits.

Automobiles manufactured in Europe and imported into the U.S. may offer an opportunity for American consumers to save money due to the waning euro. However, the same principle holds true for luxury European automobiles like Mercedes, BMW and Audi: Manufacturers know they do not have to reduce prices in the U.S. due to strong demand.

For example, Audi’s sales in the U.S. rose by fifteen percent last year and Mercedes’ sales were up almost ten percent. If you want a deal on a European automobile, consider a Volkswagen. VW sales in the U.S. fell by three percent last year, so some experts believe they might use the weak euro to reduce their prices and boost sales.

Finally, remember that many European automobiles are actually built here in the U.S. Therefore, the prices of these automobiles would not by impacted by the euro's decline.

Perhaps the best opportunity for savings due to the weakened euro exists for Americans who are planning to travel to the nineteen Eurozone nations during the upcoming spring and summer travel seasons. U.S. dollars have more purchasing power when the value of the euro against the dollar is low.

Therefore, each dollar spent in Europe will buy more goods and souvenirs and go farther toward the purchase of meals, hotel stays, taxi rides and attractions. In effect, a weak euro and strong dollar results in a “sale” on these and other items for Americans traveling in the Eurozone.

What About Investing?

The impact of the ailing euro on U.S. investors is a little bit harder to gauge. Fluctuations in the exchange value of worldwide currencies occur every day, so to some extent, they are not unexpected in the investment markets. However, a drop as drastic and sustained as the euro’s does tend to have more of an effect.

For starters, the euro’s fall could have a negative impact on many global companies, which could hurt their stock prices. In addition, as the purchasing power of European investors diminishes, they might start investing less money — whether in stocks, bonds or commodities. This could hurt the stock prices of European companies and U.S. companies with a heavy presence in Europe.

However, these factors need to be weighed against the potential impact of the ECB’s recently announced bond-buying program on worldwide equity markets. The added liquidity that the program will inject into global markets will tend to boost equity prices in general. Stock markets all over the world soared on January 22 when the program was announced: The Dow Jones Industrial Average and the S&P 500 both rose 1.5 percent, Germany’s DAX rose 1.3 percent, and France’s CAC-40 rose 1.5 percent.

A falling euro may be good news for European stocks, which rose to seven-year highs after the bond-buying program was announced. A weaker euro boosts the price of imports into European nations, which will help increase inflation (which has been dormant in the Eurozone), while also making European exports more attractive abroad.

After the ECB’s announcement, the chief global equity strategist for a major U.S. investment firm stated in an article in the Wall Street Journal that he believes the move will provide lasting support for stocks: “Deflationary risks have made Europe appear un-investable to many investors. Fading this risk could be worth a lot on current prices and we believe it wouldn’t take much to turn a vicious cycle into a virtuous cycle — at least for a while.”

It will be interesting to see what happens to the value of the euro this year and whether or not it actually reaches parity with the U.S. dollar. As you watch these developments, keep in mind how they could affect you as both a consumer and an investor.

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