High Euro Poses Great Risk for the Stock Market

In my morning call on Livestream.com today I discussed the relationship between the Dollar and the Euro and why the relationship is so interrelated to U.S. share prices.  The Euro recently traded to 52 week highs versus the U.S. dollar.  I believe that the peaking of the Euro and other currencies against a declining U.S. Dollar has been the impetus for the highest U.S. share prices for 2009.  

A declining U.S. Dollar is “perceived by investors” to be a positive for U.S. multinational corporations because a lower dollar reduces the prices of U.S. goods and makes them more competitive in global markets.  The theory is that with lower prices revenues expand and profits go up.   Therefore, the declining dollar is supposed to create a tailwind for U.S. companies.

While the theory is correct the one thing that investors are not taking into account is the high currency volatility over the last 15 months.  The relationship between the Euro and the Dollar has been a volatile one with both currencies hitting 52 week highs and lows against each other over the last 12 months.  The volatility between the two currencies, which represent the world’s two largest economies makes its very difficult for large multinational corporations on both sides of the Atlantic Ocean to efficiently make their  price changes so that they can capitalize on the currency swings.  Due to the currency volatility Corporations on both sides of the pond have been caught in a perpetual change in prices and budgets.  It is very difficult for the management of any company to operation under such conditions.

The fact that the Euro is currently trading at a 12 month high against the U.S. Dollar should make U.S. investors who are currently invested in the stock market nervous.  The reason why is because if one takes account of the currency swings over the last 12 months the odds are much greater that the Euro will decline precipitously against the Dollar over the next 12 months than vice versa.  Finally, the downside of the Euro trading at a 52 week high against the Dollar is that the European economy will be stifled  because its goods will no longer be attractive to U.S. consumers and the consumers of those countries in South America and Asia who have currencies, which are pegged to the U.S. Dollar.

Investors should be in 80% cash and should be ready for a significant correction in the U.S. stock market.