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If the USD becomes weaker compared to EUR in the future, would it be wise for a European investor to buy US stocks?

I imagine the following scenario:

I buy 100 Shares of a company at 1$ each. Let's assume, that at the moment 1$ = 1€.

One year later my shares are worth 110$. But at that time, 1$ = 0.8€. So when I sell my shares I receive 110$ = 88€ and have actually lost money, despite my investment producing gains.

Is this whats going on right now? Is the dollar weaker now, because of inflation and all the "gains" we see in the US are in a big part just inflation? There was news, that suggested that the US government wants to weaken the dollar in order to increase export. This mechanism works for buying things now, but has the opposite effect for investors correct? So this will actually decrease foreign investment?

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    But what if this 'trend' reverses? Investing in a foreign currency adds risk, not just easy reward. – Grade 'Eh' Bacon Feb 1 '18 at 20:40
  • @Grade'Eh'Bacon Lets assume it doesn't for the sake of the argument. What does that mean? – user1721135 Feb 1 '18 at 20:41
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    Nitpick - "Trump said he wants to weaken the dollar in order to increase export." Trump did not say that, a member of his cabinet did. Trump actually stated he wants a stronger dollar. – D Stanley Feb 1 '18 at 20:49
  • @DStanley I am trying to figure out what a weaker dollar in the future would mean for a foreign investor. Lets not make this about who said what. – user1721135 Feb 1 '18 at 20:55
  • "Let's assume it doesn't for the sake of argument" If you have a question that assumes that the world doesn't work the way it does, then an answer won't be particularly meaningful. – Grade 'Eh' Bacon Feb 1 '18 at 20:55
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Some European stocks are currently doing quite well in US-dollar terms.

As far as what might happen in the future- there is no guarantee that if the US sets off a round of dollar devaluation that European and Asian countries won't match it tit for tat. They have economic levers they can pull to make that happen. Also a dropping dollar will accentuate the US-dollar-denominated returns of companies that do business internationally, so you might expect their share prices to increase relative to domestic-only companies.

You always have the option to hedge against currency risks or not (and you can buy investments that optionally have that hedging built in), which tends to decrease your losses if things go against you, but also moderates your gains if they go the opposite way. The cost of hedging will give you some idea of what the market thinks will happen at the instant you check it, but of course things could change (literally) overnight.

A European investor who plans to retire to Florida (or a US-based investor planning to retire to the south of France) might feel more comfortable with some investments in currencies tied to future expenses.

  • Are these levers basically inflation? – user1721135 Feb 1 '18 at 21:21
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    Cutting relative interest rates will typically depress the currency more than other factors. It may result in inflation in the future but I'm not sure the economists really understand it fully. – Spehro Pefhany Feb 1 '18 at 21:26
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Simply Answering your question," would mean for a foreign investor?": OPPORTUNITY

Let assume that US will weaken USD to boost export, then your scenario occurs. but It is not the truth.

Reinforced by weak USD, US company will have competitive edge against their peers, thus, help them to earn more.

When company earn more, their stock price soar (in the long run) Incremental rate of stock price will outpace decreasing USD

Here is the illustration 1. weak USD (by 25% for 5 years) 2. US export boosted 3. US company have better earning and profit more 4. stock market rise 50% for 5 years outpacing the inflation 5. Investor still happy due to gain relative to inflation

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