Cheap gas prices might be creating some extra wiggle room in your wallet. But that’s likely not the case for your portfolio, especially if you invest in a lot of multinational corporations.
You see, the collapsed price of commodities has dragged the euro down, as well.
The state of the euro is even weaker when measured against the price of gold. And weak foreign currency means lower profits for U.S. corporations with ties to those economies.
But the Europeans don’t seem to be too worried. In fact, they’re downright zen!
After all, a weak currency can provide significant advantages to their economy.
Not Worth Its Weight
The price of gold in euros has increased by over 18% year over year. As the euro continues to fall, gold – which is in a bull market in euro terms – will continue to rise.
By comparison, gold prices in U.S. dollars have barely budged over the same time period. Gold is up just $4.70 per ounce. Less than 1%! That’s because gold, like oil, is denominated in U.S. dollars.
Thus, the euro is down around 17% compared to the U.S. dollar.
Now, there’s no question that a weak currency has its downside…
For example, while oil prices have collapsed by more than 52% year over year in U.S. dollar terms, the price has fallen just 35% based on the euro.
But when you focus on the long term, a weak euro can be wildly beneficial.
Patience Is Golden
A weaker euro will actually end up being quite advantageous in a year or so.
That’s because a weak currency stimulates exports, which, in turn, stimulates manufacturing. Ultimately, this leads to economic growth and more employment.
When the euro first came to market, it traded well below parity against the U.S. dollar and European economies boomed as a result. The same will be true this time…
In fact, the Europeans are not as freaked out by their weak currency as they could be because they’re counting on this outcome… much to the chagrin of the United States.
The recent spate of earnings from several U.S. multinational corporations have proved that point.
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In fact, currency hits have been as much as 15% for some companies that failed to hedge their bets properly. Those companies seemed to forget that, in a global economy, everything is intertwined – even profits and losses.
So, essentially, as the EU waits for the weak euro to pay off, it’s indirectly sabotaging some U.S. investors’ portfolios.
For now though, quantitative easing and low interest rates are going to continue to push the euro lower for the foreseeable future.
It would not surprise me at all if we see the euro at parity with the dollar in a year – we’re only about 10% away.
If the Europeans succeed at quantitative easing (and avoid the Greek contagion or any other major blunders), we will see European markets outperform the U.S. markets in the next few years.
The country that is set to benefit the most from the weaker euro is Germany.
It is the industrial and production capital of Europe, and a cheap euro means increasing exports and boom times for an economy that’s already doing well.
One way to participate is to gain exposure to Germany through an exchange-traded fund like the WisdomTree Germany Hedged Equity Fund (DXGE), which allows you to benefit from the rise in the big German exporters like Daimler, Bayer, Siemens, Volkswagen, and many others – while also hedging against the fluctuating euro.
And the chase continues,