USD Weakens Against the Euro

US investors who had invested into stocks in Europe and Asia may soon find the best times are over. Two-thirds of the 116% return that investors got from the Dow Jones Stoxx 600 Index since January 2002 has come from the decline of the dollar against the euro. The dollar reached a 20-month low against the euro and a 14-year low versus the British pound in the week ending December 1.

Now investors are facing a potential double whammy. The dollar’s weakness may restrain exports to the US, stocks around the world and hurting economies. And the currency’s slide might finish, eliminating the added kick for American investors.

Lincoln Anderson, chief investment office at Boston-based LPL Financial Services says, “If you are a US investor who invested in Europe, you’ve had tremendous outperformance since early 2002.” According to him, now such investors should “start cutting back on their overseas investments”.

The Stoxx 600’s 116% return in dollars since early 2002 contrasts with 39% in euros. In 2006, Germany’s Dax Index is up 30% in dollars and 15% in euros. The France’s CAC 40 Index is up 25% in dollars and 11% in euros. In Spain, the IBEX 35 Index has risen 43% in dollars and 27% in euros. Outside of the euro region, the FTSE 100 Index in the UK has climbed 7.2% in pounds and 23% in dollars.

US investors have also done better in Asia. Japan’s Nikkei 225 Stock Average has gained 3.7% in dollars and 1.3% in yen. In many cases, Americans’ dollar-based gains outside the US outpace their earnings at home. In 2006, The Standard & Poor’s 500 Index has risen 12%. US investors have invested $106 billion into mutual funds that invest in stocks outside the US. This is up 40% from the same period in 2005.

According to Michael Metcalfe, a senior strategist at State Street Global Markets in London, at the moment, the windfall effect of dollar weakness would encourage US investors to continue to lose their home-market bias. A weaker dollar would make imports into the US more expensive, hurting exporters around the world and thus depressing international stock markets.