E How To Protect Your Portfolio From A Weak Euro

The Euro has had a tremendous comeback from the dark days of 2012. Back then fears of Greece leaving the European Union were recurring catalyst for downward moves in the Euro's value. Since then, debt levels and secession from the Union are no longer major concerns. These days, the greatest factor affecting the Euro exchange rate is the European central bank.

The old Wall Street adage "don't fight the fed" is relevant to other central banks. When a central bank wants something, it usually happens. Right now, the European Central Bank has voiced its concerns over the low-deflation levels in Europe.

As you can see from the graph above, from tradingeconomics.com, Euro area inflation has been consistently decreasing. Fears of deflation have caused the ECB to begin discussing quantitative easing measures. In a nutshell, if the central bank wants more inflation, they will print money. When a central bank prints money, everything else held constant, that country's currency will depreciate. 

Since the easing plans were announced by the ECB, the Euro has depreciated significantly relative to the U.S. Dollar. Until the Euro-zone's inflation levels start picking up, we should see more easing and hence more weakness in the Euro relative to the dollar. Now, if the Federal Reserve was also easing, the two monetary policies of the central banks may cancel each other out. However, the Federal Reserve's Chairman, Janet Yellen has made it clear that the Fed will continue shrinking its easing activity.

Bottom line, the ECB wants a weak Euro and the Federal Reserve wants a strong Dollar. Don't fight the fed!

How a depreciating Euro may affect your portfolio

If you own stocks of companies who do business in Europe, your portfolio has some exposure to the Euro: the companies you own likely receive Euros as payment for products or services in Europe and converts the Euros back to its domestic currency. A depreciating Euro will negatively affect the value of the company's converted currencyhttp://www.investopedia.com/articles/basics/12/portfolio-currency-exposure.asp. In a nutshell, a depreciating Euro could mean lowered profits for the Euro-exposed companies you own shares of.

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Beat the S&P 500 recommends shorting the Euro

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