In the global, 21st-century economy, changes throughout the world can impact stock prices and the fortunes of U.S. investors. The euro, which is the standard currency of the European Union, is tied to the U.S. stock market in a number of indirect ways. Even though the U.S. stock market is priced in dollars, a strong exchange rate for the euro relative to other currencies generally affects U.S. stocks positively.
The Euro's Significance
As of 2013 the euro is the currency of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain. The U.S. stock market is tied to the euro in two important ways: European stocks and international mutual funds, priced in euros, are an investment option for U.S. investors that compete with U.S. stocks, and U.S. companies do business with European consumers, who earn and spend their money in a euro-driven economy.
A stronger euro means more buying power for European consumers. This causes a rise in exports by American companies to Europe, which is among the largest consumers of American goods. In turn, American companies see their revenues rise. Higher revenues signal good financial health to investors, whose demand for shares pushes up the value of the stock. The opposite can also happen; a declining euro causes American companies to export less, or cut production, resulting in slumping stocks.
A stronger euro affects some U.S. stocks more than others. American companies that don't provide many goods or services to European customers don't see the same revenue increases and rising stock prices as those that do. Where individual American and European companies compete with each other for investors, a U.S. company can see its stock price rise if demand increases. This happens when American investors stop buying the European stock because of its exchange rate-inflated price.
Effects for U.S. Consumers
American investors who see their portfolios rise in value when the euro is strong feel the effects of a strong euro in other ways, too. When the euro is in a strong position relative to the dollar, imports from Europe cost more. American consumers see prices rise and may turn to domestic goods, boosting the revenue of American companies. Americans who travel to Europe see their money buy less when the euro is stronger. This can bolster the domestic tourism industry if travelers decide to stay in the U.S. and spend their money closer to home.