As the dollar falls, the euro rises, and with it fears that its strength will penalize French and European exports, halting the economic recovery and sending stocks plunging. But nothing to be alarmed about. In fact, the recent appreciation of the single currency is modest. And, even as it grew in importance, the strength of a currency never sounded the death knell for exports and growth. Here's why.

Pessimists argue that the strength of the euro makes European exports more expensive for consumers abroad. If that were the case, France and Europe would indeed be threatened. Before the Covid-19 crisis, exports accounted for 31.8% of France's annual GDP, ahead of the global average of 30.6%. Exports occupy an even more important place in the euro area economy, with 45.8% of GDP.

Moreover, the latter are already at relatively low levels. Despite a rebound in May, June and July, France and euro area exports closed August down 16.6% and 11% respectively from February levels before the lockdown measures were introduced. The most worried will hasten to say that this accentuates the threat posed by the strong euro.

catching up. But let us not overestimate the strength of the European currency. It has certainly appreciated by about 11% against the dollar since the low of March 20, which may seem considerable. But in reality, it is essentially a catch-up compared to the sharp contraction that took place between 9 and 20 March (-6.4%). This fall of the euro is a classic, but short-lived, episode of "flight to quality" that supports the dollar during market downturns. Panicked, equity investors then rush to US Treasuries, deemed safer, which some acquire by selling other currencies to buy dollars.

Take the example of the global financial crisis: between April 2008 and the low point of the bear market for equities observed in March 2009, the dollar appreciated by no less than 27% against the European currency. Calm then returned and the euro jumped 13.5% against the greenback between March and the end of 2009. Yet the economic recovery began in June of that year. French and eurozone equities jumped 62.9% and 66.9% respectively between the March low and the end of the year, beating the then global average of 52.3%.

The "Euro-pessimists" therefore seem to forget this episode of history. The current exchange rate is almost at the same level as in 2017, when the single currency grew by 13.8% against the dollar, while exports from the France and the euro area jumped by 5.0% and 7.1% respectively. French GDP growth that year was 2.4%, and that of the euro area was 2.6%. For its part, the CAC 40 gained 12.7% and the euro zone markets 12.5%, ahead of the rest of the world.

In 2013, the euro remained above the current exchange rate throughout the year. Its bottom was reached on 27 March 2013, then the single currency appreciated by 7.2% until the end of the year. As today, this journey was preceded by a recession, with the slowdown caused by the eurozone debt crisis ending in Q1 2013. The strength of the euro did not hinder the recovery of the French economy, nor its exports, which rose by 2.1% in 2013. The CAC 40 jumped 22.2% in the same year and eurozone equities jumped 19.6%, ahead of the rest of the global markets.

This does not mean that French markets will necessarily outperform thanks to a strong euro in 2020. On the other hand, it shows that the fears surrounding the strength of the euro are unfounded.

Investors who missed the rebound that began in March are desperately clinging to any evidence to support their pessimism, such as the appreciation of the euro. This is a typical case of confirmation bias

Some fear, however, a further rise in the single currency, but this reasoning obscures the fact that a strong currency does not penalise economies for several reasons. Nowadays, few European products come exclusively from the country that produces them. Raw materials, machines and components are often imported by manufacturers.

Take the case of Airbus, the flagship of European aeronautics. Its activity is based on 26,000 suppliers based in 100 different countries. Three of its six assembly plants are located outside the euro area. A strong euro reduces the cost of imported products and activities based abroad.

Die in euphoria. We are not saying here that a strong euro has only positive aspects; more than 60% of Airbus' revenues come from Asia and the Americas. Simply, the impact of the currency is much less detrimental than experts predict, especially considering that management teams have no trouble hedging against currency fluctuations. Fears related to hard currencies are mercantilist reflections of another time.

Experts almost always say that currencies are too strong, penalizing exports, or too weak, fueling inflation and other concerns. At the moment, U.S. observers are not happy about the weakness of the dollar; on the contrary, they fear it, believing that foreign exchange markets anticipate future problems while equity markets, driven by the United States, ignore them. Which is absurd.

Fears on both sides always reflect the mood of investors and not economic or market realities. Investors who missed the rebound that began in March are desperately clinging to any evidence to support their pessimism, such as the appreciation of the euro. This is a typical case of confirmation bias. People are on the lookout for any information that supports their beliefs and ignore anything that contradicts them.

The scepticism of the "Euro-pessimists" in the face of the solidity of the single currency is your ally. As legendary investor Sir John Templeton once said, "Bull markets are born in pessimism, grow in skepticism, mature in optimism and die in euphoria. The current fears surrounding the single currency are part of the pessimism that usually prevails at the beginning of a bull market. This suggests that the latter still has a bright future ahead of him.

Ken Fisher is President and Director of Fisher Investments Europe, Executive Chairman and Co-Chief Investment Officer of Fisher Investments.

Bey Media Press & Internet SAS