The Decline and Fall of the Euro

Chart of the Week for August 11-17, 2000

When the euro debuted in January 1999, it was heralded as a potential competitor to the US dollar as a “reserve” currency— one investors could hold with a reasonable expectation of stability. Instead, the euro has declined more than 23% since inception through August 10, 2000.

A decline in a foreign currency hurts US investors holding foreign stocks denominated in that currency. That’s because as the foreign currency weakens, it takes more units of that currency to buy back a dollar, which an investor ultimately needs to do. So while a foreign stock may have generated an attractive gain, that gain will be reduced, or even eliminated, when translated from the foreign currency back into dollars.

An example: stocks in the Euro Zone have risen 5.6%, measured in euros, YTD through August 10. However, the euro has fallen (9.4)% in value relative to the dollar for the same period. So the 5.6% gain becomes a (4.2)% loss when translated from euros back into dollars.

Currency movements are unpredictable, but the big-picture view is that gains and losses will wash out over the long term. Overall, it’s economic variables, not short-term currency movements, that influence long-term return.

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