Currency market oscillations have always remained one of the variables that most affect investment and therefore must be monitored the most to ensure that a stock market transaction is as successful as possible – in every sense.
He euros/dollars It is, in this sense, one of the most closely monitored exchange rates. However, European investments which concern North American companies or vice versa (European companies which interest American investors) represent a good part of stock market transactions at the global level. And this deserves even more vigilance, in an environment of volatility such as that which the proximity of the electoral elections in the United States can cause.
The pair is recovering bullishly. After reaching its historic lows in 2022, it has already recovered more than 15% and has managed in recent sessions to beat resistances that “portend increases towards at least last year’s highs in the sector “. 1.1275 dollars per euroon which the door would already open on elevations towards 1.20 integers“explains Joan Cabrero, technical analyst and strategist of eco-retailer.
On the operational level, This concerns the European investor intending to invest in North American companies as this increase would affect their investment when they wish to convert dollars into euros.. In addition, the stock market environment favors this trend: “The greater stimulus measures taken by China and the fact that the market anticipates an aggressive cycle of easing of interest rates. Federal Reserveeven if the American economy remains strong, are bodes well for risky assets“explains Elías Haddad, strategist at Brown Brothers Harriman in statements collected from Bloomberg. And added: “this encouraging risk context weighs on the dollar, mainly against growth-sensitive currencies.”
The US dollar experiences its second negative annual balance in 2024, which has not happened since before the 2008 financial crisis and which promises to materialize by the end of the year if experts’ forecasts are followed, which according to consensus Market indicators indicate that the dollar will fall below the levels at which it is currently trading against most developed currencies, such as the the euro or the Japanese yen.
However, forecasts do not yet see the euro/dollar returning beyond last year’s highs, according to market consensus. And even if they reached this level, in the 1.1275 dollars per eurothis would mean a revaluation of the pair by 0.7%. Furthermore, according to the average exchange rate of the last three years, the risk of loss also in case of purchasing dollars is almost non-existent, while the maximum profit, if the dollar were to appreciate up to its ceiling of a euro of 1.04 green bills over the last three years, it would exceed 7%.
And given the potential that analysts project for Wall Street (8.5% for the S&P 500 and 10% for the Nasdaq 100), the return/risk equation is not so august for those betting on the American market despite the evolution of the dollar.
“In the short term, We believe there is room for a rebound in the dollar as expectations of a Federal Reserve rate cut and a US recession appear overblown.“, in our opinion”, they say along these lines from Ebury, although they see the US dollar weakening against most of its main peers in 2025.
From eToro, for their part, they add that the strength or weakness of the dollar in the coming months and in 2025 “will be influenced by key factors such as the monetary policy of central banks, inflation and expectations for its subject, as well as indicators such as PMI data, which will also play an important role in the valuation of currencies And all this, without losing sight of the results of the elections in the United States in November.
Cover currency? Only in part
In this context, is it interesting for a European investor to hedge their investments in the United States in foreign currencies? “Hedging foreign exchange risk has advantages such as providing greater certainty of profitability and protecting the investor against possible depreciation of the dollar. However, it also entails disadvantages such as hedging costs, which reduce profitability , and a possible loss of profits in the event of an appreciation of the dollar”, contextualizes Sergio Ávila, of IG.
“At this time, marked by the strength of the dollar and global economic uncertainty, it may be prudent to hedge at least part of the dollar exposure to minimize riskespecially since the evolution of the euro against the dollar is bullish in the medium and long term,” he explains.
“In general, we always advise hedging any foreign exchange risk as it provides important benefits to businesses engaged in international trade, such as predictability of cash flows through fixing exchange rates ( which helps prepare accurate budgets) and protect against adverse market movements, mitigating risks associated with currency fluctuations that could result in unexpected costs or impact profit margins,” they add from Ebury.
“Currently, volatility in the foreign exchange market is increasing due to geopolitical uncertainty and central bank interest rate decisions. By analyzing what some companies are doing, one could understand that many are choosing to extend their hedges, which reflects a perception of higher risk in the short and medium term”, explains Javier Molina, senior market analyst for eToro.
However, everyone agrees that the decision whether or not to hedge exposure to currencies, and the dollar in particular, depends on several key factors such as each investor’s risk tolerance and time horizon.
From UBS, Mark Haefele, CIO of the company, focuses on the weakness of the dollar and says that “it is on course to continue to fall” given the trend of recent years, the economic growth of the country American and the tightening which arouses interest. interest rates in the United States are starting from a higher position and the actions of the Fed are causing a narrowing of interest rate differentials, which supports the evolution of the euro and the pound sterling by compared to the dollar.
“If you’re investing in the US, you potentially need to think about hedging currency risk. Especially if you think the dollar is going to fall, but the important thing is that you look at your portfolio and exposure to the US and the perspectives”
