The euro has risen sharply against the dollar in recent months. In monetary union, such a movement will weigh on inflation, growth, profits of listed companies... and equities.

How far will the euro go against the dollar? The single currency has recovered from its superb last few months, with the EUR/USD (or euro/dollar) pair jumping 8% in just three months, bringing its gains over the last six months to 10%. The dollar is suffering from the fall in US government bond yields (because a lower-paid currency is logically less attractive), fears of a prolonged lockdown in some parts of the United States (the pandemic continues to be a stain of oil) - with a new shock to the economy at the key -, and the inability of Congress to agree on an extension of the unemployment benefits system.

Conversely, the euro benefits from the spectacular support measures implemented by Germany and the European Union. In this regard, the announcement with great fanfare of a historic agreement for the 'reconstruction' of Europe in the face of the coronavirus crisis was welcomed by governments, companies and economists," said broker Mirabaud Securities. Still, while the surge in the single currency reflects renewed hope on this side of the Atlantic, it has as a corollary a number of unfavourable developments, on the fronts of inflation, economic growth and equity markets. And it also risks affecting the different countries of the euro area in a differentiated way. An overview.

Shock to inflation

By appreciating, the euro mechanically makes goods imported into the Economic and Monetary Union cheaper. This phenomenon therefore weighs on inflation (the rise in prices). While inflation is only close to 0.4% in the euro area, the European Central Bank (ECB) could thus increasingly struggle to achieve its target of 2% inflation. Especially since "according to the ECB's calculations, a 10% increase in the euro against a basket of representative currencies, the famous effective exchange rate, translates into one point less inflation", reports Mirabaud Securities!

Exports and growth held back

The rise of the euro is also making goods exported by companies in the Economic and Monetary Union more expensive. More expensive for consumers in other countries, our products will therefore sell less, which will weigh on our exports... and therefore the economic growth of the euro area. "A 10% increase in the effective exchange rate of the euro translates into a lower growth of about 0.5%," says Mirabaud Securities. Fortunately, the economic recovery currently observed "is largely explained by a recovery in domestic demand, which is based on an increase in household and business confidence, not denied for the moment", reports the broker.

Euro area exporting countries affected in a differentiated way

While the current exchange rate of the euro is essentially the same as in 2017, the IMF was raising while the level of the single currency in the euro area was too high for some countries and too low for others. "The real exchange rate of the euro is undervalued by 10% to 20% for countries like the "Germany and overvalued by 5% to 20% for the small countries of the euro zone," the Fund stressed at the time. As a result, the rise in the price of the single currency leads to "a redistribution of export market shares between European countries," notes Mirabaud.

France and Italy are expected to suffer. While Italy has seen its exports to the United States increase in recent years, particularly in the fashion, accessories, jewelry, food, automotive and machine tools sectors, the depreciation of the dollar against the euro is obviously bad news...

While the equilibrium rate of the euro against the dollar is estimated at 1.15 for the France, the single currency is currently overvalued for France. The aeronautics (Airbus) sector - already devastated by the massive fallout from the health and economic crisis -, food (Pernod Ricard), automotive, pharmaceuticals/cosmetics (Sanofi, L'Oréal) and luxury (Kering, LVMH) "should suffer", Mirabaud J.

Conversely, Spain and Germany will be less affected. Spain exports mainly to Europe. "More than half of exports are to the euro zone and two-thirds to the European Union," mirabaud Securities said. Germany benefits from a favourable exchange rate, with its equilibrium rate against the dollar estimated at 1.25. In addition, "only a quarter of German exports are still denominated in dollars, when a third of foreign trade is destined for the euro zone and therefore does not suffer any exchange rate effect," says the broker.

Profits and shares of eurozone listed companies are likely to be struggling

The depreciation of the dollar against the euro weighs on the profits of our multinationals internationally. According to estimates, "a 10% appreciation of the euro reduces companies' earnings per share by about 6%," reports Mirabaud Securities. Financial analysts are likely to revise their earnings per share estimates... and thus the price targets of many eurozone stocks. A negative development for the equity markets of the euro zone... The rise in the price of the euro against the dollar should thus encourage equity investors to be cautious...