Euro Gains On Dollar – And Stocks Hate It

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What's going on here?

The euro jumped to its highest level in three years versus the US dollar on Thursday after the President of the European Central Bank (the ECB) highlighted the eurozone’s strengthening economy.

What does this mean?

The ECB announced last year that it would begin scaling back its policies aimed at supporting the eurozone’s economy in September 2018. But as the economy seemingly keeps improving, investors are increasingly taking the view that the ECB will scale back its support more quickly than first announced. Thursday’s ECB meeting didn’t really do anything to dissuade investors from this burgeoning view.

Why should I care?

For markets: The ECB President’s comments helped the euro gain versus the dollar.

The euro has risen almost 2% over the past two days, partly because the US dollar has declined versus all major currencies in the wake of comments from the US Treasury Secretary that appeared to support a weaker dollar. But on Thursday the euro generated some momentum of its own: if the ECB does take action that allows interest rates in the eurozone to rise more quickly than anticipated, then international investors are likely to buy the euro as they seek out the relatively higher returns offered by euro-denominated investments.



The bigger picture: A stronger currency creates a headwind for stocks.

As the euro and pound have risen sharply versus the dollar this week, stocks in the eurozone and the UK have declined in price, while those in the US have shot higher. The explanation is pretty straightforward: European and British companies are making less money, in terms of their home currency, from their international operations (most of which are either in the US or, effectively, priced in dollars) – while big US companies, which generate a lot of their profits outside the US, are seeing their revenues rise (in US dollar terms).

Image source: Grzegorz Czapski / Shutterstock.com
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