The High Euro is Taking Its Toll

The euro is high, the US dollar is low. So what is else is new?

Earning euros and spending dollars is great right now – everything you buy in the US has a built-in discount of 30 to 40 percent. Earning dollars these days is not such a great thing.

And that is the challenge for multi-national companies. If they are earning euros, they are happy to invest in the US these days (buy, buy, buy!) and a lot of companies have announced plans to do so. (Take Volkswagen, for example, who plans on building production facilities in the US.) But when they sell their products in the US, they get less for the dollars received, which cuts into margins.

That’s Economics 101 right there. What surprised me was the dimensions of the margin cuts. The Aerospace and Defense Industries Association of Europe announced recently that every rise of 10 cents in the euro against the dollar led to a margin loss of one billion euros for EADS, the parent company of Airbus. That’s huge.

Other industries are reporting the same thing. Deutsche Telekom, the German telecommunications giant, reported negative currency effects of almost $800 million in the first quarter of 2008. And that was just for one quarter.

It’s no wonder that large German companies keep announcing cost cutting measures, even though they are still profitable.

Relief is not in sight: Analysts expect the euro to go above the $1.60 mark. Interest rates in the euro-zone are higher than in the US right now, in an attempt to keep European inflation down. Money moves towards higher interest rates.

Image from usmint.gov