One euro currently costs just shy of USD 1.23. The common European currency last reached such heights in December 2014. Let us recap: The debate one year ago was whether or not the euro/dollar exchange rate would reach parity. The euro has appreciated by nearly 17% since then.
The sharp increase in the common European currency will present German companies with more and more challenges in the months ahead.
German companies are known for their strong export trade. Based on our analyses, the share of sales of the German HDAX companies invoiced in USD was 28% (the HDAX comprises the companies included in the DAX, MDAX and TecDAX indices). This exposes them to increased risks through changes in exchange rates.
However, 23% of the costs are also incurred on a USD basis, which puts the approach into perspective. It is also not that advisable to focus on the current (=incidental) “extreme” euro/USD rate of 1.23. A longer term observation of the development puts the most recent exchange rate movements into perspective.
As a general rule, a stronger euro such as we are experiencing at present tends to weigh on the export-oriented German companies and impact on competitiveness. However, not only are the effects on the individual companies considerably more difficult to measure, but they also vary. The following aspects must be taken into consideration here: translation or currency transaction effects, natural hedging in the form of local production capacity, borrowing in USD, hedging transactions etc.
We assume that German companies will continue to cope quite easily with the strong euro. They managed comparatively well with the strong common currency, even in 2006/2007 when the euro quickly marched towards 1.60. Nonetheless, some companies will no doubt strike up a lament in the reporting season ahead and in some cases their equity prices will also suffer under these “warnings”.
As we see it, the prospects for the German export sector have improved significantly since the start of 2017. Although the higher euro will undoubtedly curb some international markets, the positive effects of the global economic recovery and in particular the economic improvement in Europe will prevail.