With Spain's nosediving economy and Greece's potential exit from the euro, the shared currency has fallen to two-year lows against the dollar, and is now at $1.23. Despite its recent decline, however, one might naturally ask why it hasn't dropped further. When the euro was first put into circulation on Jan. 1, 2002, it was worth just $0.90, and went down as low as $0.86 in March 2002. Even when it was first traded as an accounting currency in January 1999, it was worth $1.17, less than it is today. The chart below shows the euro's value in dollars over its history.
Source: European Central Bank
Ah, mon dieu
The continental currency has fallen considerably in the past year, 13% off from $1.43 last June. Considering how low it traded when it was first introduced, at another time when the U.S. economy was slow, it seems like there's plenty of room for it to fall. The euro's strength has also held up against other major currencies. As the euro declines, companies doing business on the continent gain less from their sales, as those cash flows translate into fewer dollars. Let's take a look at three companies taking a hit on a weaker euro, and who would stand to lose more if the currency falls further.
The value of a euro has declined from a value of 5.23 Israeli shekels last August to 4.85 currently.
Philip Morris International
But it works both ways
Of course investors could take advantage of the opposite effect by purchasing shares of European companies with large exports such as Heineken, adidas, or BMW. If the euro continues to fall, imports will become more expensive for the monetary union, while European goods will get cheaper for the rest of the world.
As the chart above shows, currency fluctuations are hard to predict and often occur for no apparent reason. For instance, during the euro's steady rise between 2002 and 2008 when it rose as high as $1.58, the American economy actually outgrew the EU's, at an annual of rate 2.6% compared to 2%. One reason for the euro's gain could've been initial skepticism toward the shared currency, which could have driven its value down before its introduction. Of course, currency exchange rates are subject to other factors as well, including interest rates and inflation. Lower interest and inflation rates will help keep currency values higher by preserving the purchasing power of the currency and encouraging borrowing.
Like many other observers, economist Charles de Grauwe of the University of Leuven in Belgium, believes the euro is slightly overvalued, deserving a price between $1.15 and $1.20. The falling euro could help stimulate the struggling economies in the eurozone by encouraging exports and purchasing within the eurozone. Investors with exposure to the continent will want to pay close attention to the travails of Spain and Greece, as well as any other signs that could further depreciate the shared currency.
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Fool contributor Jeremy Bowman owns shares of SodaStream International. The Motley Fool owns shares of Coca-Cola and SodaStream International. Motley Fool newsletter services have recommended buying shares of SodaStream International and Coca-Cola. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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