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Back You are here: Home Market Market Update Insight The Impact of Weaker Euro on US Stocks

The Impact of Weaker Euro on US Stocks

Nearly half of the S&P 500’s revenue now comes from abroad and almost 30 per cent from Europe. The weakness of currency may have impact on corporate earnings.

Naturally, utilities, telecommunications and companies derived its earnings in US dollar would see little impact such as ExxonMobil since oil is priced in dollars globally. However, other multinationals such as General Electric, Caterpillar, Pfizer or Apple might stand to see big translation gains from 2006 until 2008 become losses. With reference to the chart, it can be observed that the dollar was weak against Euro and most currencies from 2006 till Jul 2008; thereafter, the dollar, seen as the safe heaven, strengthened against Euro and most currencies.

EuroVsDollar20052010

Analysts at Bank of America laid out scenarios for the S&P 500’s earnings in 2011 based on various oil prices, growth levels and exchange rates. Holding oil and growth steady at moderate levels, earnings could range from $78 to $95 based on either euro-dollar parity or a rate of $1.30, respectively. In other words, investors could be paying as little as 12 or as much as 15 times prospective earnings by owning US equities – no small difference.

In short, currency exchange rate may have significant impact the multinational companies that derived currencies from the international markets.

Reference: Financial Times, 2010-05-18, “Dollar damage to profits”