As an investor whose income is in Euros I have a problem. The rising value of the Euro will probably hit the bottom-line profits of European multinationals. The European economy is recovering and seems to be a good place in which to invest funds. American shares are attractive in terms of profit potential but the rising euro makes it dangerous to me to invest in them. The same applies to investments in the developing countries. Brexit makes investment in sterling denominated shares questionable. What is your opinion on this question?

Eoin Treacy's view

Thank you for topical question. The question of how to invest against a strong currency market environment is something Euro denominated investors have not had to deal with for quite some time. 

Generally speaking, a 1:1 ratio is not evident between the performance of the currency and stocks so that should be the first argument in favour of remaining within the Eurozone. 

When we redenominate the S&P500 into the Euro the weakness of the Dollar has clearly taken a toll on performance for non-US investors. Enterprising ETF firms created currency hedged funds for both the Euro and Yen when nominal stock prices were rising but the currencies were declining. If the Dollar’s underperformance persists it seems inevitable that similar funds will be created for foreign investors to participate in US markets. 

I agree multinationals reporting foreign earnings in Euros will face a headwind from the currency’s strength but if the US Dollar’s strength in 2014 is any guide economic growth trumped currency considerations. Let’s not forget that the Euro’s strength is a powerful attraction for international investors and if the Eurozone is back on a growth footing that opens the potential for capital and currency market appreciation. 

The Euro STOXX 50 Index has almost completely unwound its overextension relative to the trend mean, as it continues to pause above 3400. A sustained move below that level would be required to question medium-term uptrend consistency. 

It occurs to me that the fact this email is raising such important questions is a testament to how much the Dollar has already fallen. The US Dollar Index has a deep oversold condition and the first clear upward dynamic is likely to signal a low of at least near-term significance and potentially even the onset of a short covering rally.