Euro hits all-time record vs U.S. dollar -- How to benefit

July 25, 2007

The euro is now worth $1.38, reaching an all-time record and causing consternation for French and German exporters and U.S. vacationers. France's new President, Nicolas Sarkozy, outraged fellow EU members by suggesting the ECB become less independent. The ECB's high interest rate policy is one reason the euro has become so strong. Sarkozy complains that French exports have become less competitive as the euro has climbed. The President of the German automakers association also said that the high euro has cost his industry €666 million in profit last year.

The British pound, now worth over $2, also hit a 26-year high against the dollar. Both currencies are rising as a result of increasing interest rates. The Bank of England increased its central rate to 5.75 last week. On June 13, the ECB raised its rate to 3.00. (Source: Der Spiegel, European Currency Hits All-Time High Against the Dollar, July 12, 2007; Sarkozy's 'General Attack' on the Eurozone, July 11, 2007)

What high value of euro vs U.S. dollar means:

A high euro means more expensive vacations for Americans in Europe, as well as higer costs for imports from Europe. The good news is that it helps U.S. exporters to Europe. Unfortunately, the euro area only comprises 16% of total U.S. exports. (Source: U.S. Census, ytd as of May 2007)

Of greater concern for the slowing U.S. economy is that a strong euro could also mean higher U.S. mortgage rates. A weak dollar will lower demand for U.S. Treasury notes. Strong demand has kept interest rates lower than even the Fed Funds rate, resulting in an inverted yield curve. As demand for Treasuries declines, their yields will increase, which will drive up mortgage interest rates. If the dollar declines too rapidly, investors could panic, which could lead to a dollar collapse. This would be devastating to the U.S. economy.

Action steps:
Find out how to profit from a strengthening euro, and protect yourself from a dollar collapse, by reading the WorldMoneyWatch Special Report, “The Dollar Collapse."

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