Euro: A Smart Investment Move?

Investing in the euro can be a great way to diversify your portfolio. Foreign currency trading, or forex, is more complex than trading stocks or mutual funds, but it can be lucrative. The euro has weakened against the US dollar in recent years, but it is expected to regain its value once the conflict in Ukraine stabilises. If you believe the US dollar will drop in value, you can buy euros and benefit from the rise and fall of the euro. There are several reasons why an investor might want to invest in the euro, including the potential for gains, investment opportunities, and economic factors.

Potential for gains

If the euro strengthens against the US dollar, the currency appreciation would benefit US investors holding euros. This would enhance investment returns, especially if the investor can time the market and convert their euros back into dollars at a favourable exchange rate.

For example, if an investor purchased $111 one year ago, it would have cost 100 euros. Trading 100 euros for dollars today would yield approximately $107.87. Investors would have realised a loss of approximately $3.13, which is a 2.81% loss on the $111 investment in only one year.

Since its inception, a unit of the euro has fluctuated between the $0.85 and $1.58 range. The dollar was at its strongest in 2001 and 2002 when the euro began to circulate, and at its weakest following the Great Recession of 2008. In 2008, the euro to US dollar annual average exchange rate was equal to 1.47, which meant that one euro could buy $1.47.

The euro has contributed to the stability, competitiveness and prosperity of European economies for more than two decades, and is the second-largest reserve currency as well as the second-most traded currency in the world after the US dollar. It should regain its value once there is more clarity around the current conflict and the European market regains its stability.

If the relative value of the dollar rises or falls, the investor can make money from this change.

Investment opportunities

The euro is the second-largest reserve currency and the second most traded currency in the world. It is used across Europe, and many countries outside of the European Union peg their local currencies to it. This makes the euro an attractive investment for those looking to diversify their portfolios.

The euro's value is not standardised against the US dollar, and it has been fluctuating since its inception in 1999. This creates opportunities for investors to make money from changes in its value. For example, if an investor believes the euro will strengthen against the dollar, they may choose to invest in the euro and convert their euros back into dollars at a favourable exchange rate.

There are several ways to invest in the euro, including:

• Exchange-traded funds (ETFs) that invest in the euro directly or through euro-denominated short-term debt.
• Purchasing the government bond funds or mutual funds of European countries that use the euro.
• Trading in the currency market, either by buying the currency itself or through forex trading.
• Investing in foreign securities, such as stocks and bonds that are backed by eurozone businesses and governments.

It is important to note that investing in foreign currencies may come with higher risks and more volatility than the stock market. Exchange rates can fluctuate dramatically in a short period, and it is difficult to predict these changes. Investors need to be able to act quickly to take advantage of opportunities in the foreign exchange market.

Economic factors

Alternatively, if interest rates are higher in the eurozone, investors may earn more on their euro savings. The euro has contributed to the stability, competitiveness, and prosperity of European economies for over two decades and is the second-largest reserve currency. It is also the second most traded currency in the world after the US dollar.

The value of a currency is driven by actual monetary flows and events that affect a country's economic health. Therefore, investors should consider the economic climate in the countries they are interested in investing in. For example, the Russia-Ukraine conflict will likely see the euro weaken versus other reserve currencies given the Eurozone's reliance on Russia for energy. Since the war in Ukraine began, the euro has lost value against the US dollar, British pound, and other major currencies as investors believe the conflict will substantially slow the region's economic growth rates.

However, the euro should regain its value once there is more clarity around the current conflict, and the European market regains its stability.

Diversification

The three main asset classes are stocks, bonds, and cash or cash equivalents. Investors can blend dissimilar assets, such as stocks and bonds, so that their portfolio is not overly exposed to one asset class or market sector. Other asset classes include real estate, commodities, and alternative investments, which can aid in diversification due to their lower correlation with the stock market.

Investors can further diversify their portfolios by breaking down categories based on factors such as industry, company size, creditworthiness, geography, investing strategy, bond issuer, and style. For example, investors can diversify across sectors and industries by investing in transportation and technology stocks. They can also diversify across companies by investing in multiple airline providers.

Reducing Risk Through Diversification

While diversification cannot eliminate all risks, it can significantly reduce asset-specific or unsystematic risks. By diversifying across different assets, investors can protect their portfolios from being wiped out by a single negative event impacting a specific holding. However, it is important to note that diversification may also result in lower portfolio-wide returns, as it may cause investors to miss out on the potential high returns of a specific stock, asset class, or market segment.

Eurozone economic health

The Eurozone economies have had a mixed start to 2024. While inflation has been easing faster than expected, and labour markets remain robust, there are still no clear signs of household spending, which is the key driver of the 2024 outlook. Overall, we can expect a year of moderate growth with gradually increasing economic activity.

The economic situation is fragile and varies across sectors and countries. Germany was the poorest-performing major eurozone economy in 2023, with its GDP contracting by 0.3%. This was due to a broad-based decline in economic activity, particularly in energy-intensive and energy production-related industrial sectors. In contrast, the Spanish economy grew by 2.5% due to continuing tourism growth. France and Italy's economies fall between these two extremes.

The outlook for businesses also varies across sectors. The manufacturing sector is expected to remain challenging, with index values for German manufacturing showing little upward movement. However, other major eurozone economies seem to be recovering more quickly. The services sector has a brighter outlook, with the latest reading for the services purchasing managers' index climbing above 50 for the second month, indicating more positive development. Overall, the composite index for the eurozone increased again in March and is currently holding at 50, indicating stagnation rather than deterioration.

Inflation and private consumption will likely determine the pace of recovery. While inflation has been easing, services inflation has remained stagnant around 4% since November 2023 due to strong wage growth. This is a crucial factor in the European Central Bank's decision to delay discussing a rate cut until more data is available.

The Eurozone also faces external pressures, such as the Russia-Ukraine conflict, which has weakened the euro against other reserve currencies due to the Eurozone's reliance on Russia for energy. The conflict is expected to substantially slow the region's economic growth rate.

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