By Sarah Morgan
The euro slipped again against most currencies on Friday, falling to a 10-year low against the yen and hovering close to a 15-month low against the dollar. Analysts say this weakness is likely to extend well into 2012, but there are ways individual investors can prepare for another year of European crisis.
There seems to be little hope of a stronger euro in the new year, says David Song, a currency analyst with DailyFX. Not only is there no real solution in sight for the sovereign debt crisis, the European Central Bank will likely have to keep pouring liquidity into the Continent’s banking system, which will tend to weaken the euro, Song says. A recession is also a real threat in the euro-zone, he says. And slower growth in China and around the world would only intensify the contraction. The euro could easily fall to $1.20 in the first quarter and it’s possible it could fall all the way to parity against the dollar in 2012 if the crisis worsens, he says.
In fact, the euro has held up much better this year than investors might have expected. It’s on track to end a year, marked by widespread speculation about its demise, down only about 3% against the dollar. In a way, the weakness of European banks has supported the euro this year — as they’ve had to raise cash, they’ve had to buy euros, says Camilla Sutton, the chief currency strategist at Scotiabank. That demand is likely to slow next year, and hopes of a swift solution to the debt crisis have faded, meaning the euro could certainly fall to its 2010 low of about $1.18, Sutton says. “I suspect that as soon as we get through these holidays, we return to usual trading, and I think most of that will come with a shift away from [the] euro,” she says. However, she says even a Greek exit wouldn’t be enough to destroy the euro, and the currency should end the year around $1.25.
Individual investors who have European stock or bond exposure might consider working with an adviser to hedge their currency risk, says Steven Roge, a portfolio manager with R.W. Roge & Company. Roge says his firm holds a few individual European stocks, and has bought the ProShares UltraShort Euro ETF (EUO) to protect those positions against a falling euro. However, investors should know this ETF uses leverage, which means it can be risky to hold for long periods of time. Another option for individuals looking for international stock or bond exposure is to look for a mutual fund that hedges its currency exposure, like the Tweedy, Browne Global Value Fund (TBGVX) or the PIMCO Foreign Bond Fund USD-Hedged (PFOAX), Roge says.
Analysts and advisers agree the euro will be weak and markets will continue to be volatile in the new year. But for investors who don’t have direct European stock or bond exposure, the longer-term picture may not be so bleak, Roge says. “There’s still going to be a rough road ahead, especially for European equities,” he says. “But for the U.S. market I think there will only be a minor trickle-down effect from Europe.” He says he expects the S&P 500 to end 2012 up about 5%.