Hi everyone,
I’m new to the forum and in these uncertain times, I wondered if anyone could help me with the following:
Hypothetically, what would happen to a USA stock, bought in Euro’s on a European exchange, if the Euro failed at some point in the future i.e. would the owner of the stock lose everything or would the stock be revalued in USD’s?
Thanks very much,
Likely would depend on the reason for failure.
It could suffer a political failure, ala Brexit, where everyone just goes back to their own national currency. If that happens, then you will likely simply have your Euro’s converted to something else. The dollar would go up against those currencies because we would appear more stable and safer (you would get less dollars when converting).
If it fails because of some sort of financial crisis, then I don’t really think it will matter much what the conversion rate would be; your USD would not likely be worth much more than a Euro at that point simply due to the massive amount of contagion such a collapse would produce.
But, that is largely a guess. The last time we had anything close to that level of financial crisis was WW2 and our currency (as well as the rest of the world’s) operated very differently back then. We were still on the gold standard, for example. Globalization was not really a thing then.
The owner of a stock owns a piece of the company. Regardless of the currency, what they own is a piece of the company. When I look at a stock quote it is in US dollars, but that simply is the last price it traded at. Someone in Europe looking at a quote for the stock in Euros is just seeing that last transaction expressed in Euros. If the Euro “failed”, whatever that means, shares are still shares, and the owners of the shares still owns the same piece of the company. Now, seeing a price might be difficult to impossible, but since the ownership is not of currency but of shares the owner hasn’t lost anything when the dust clears.
Thanks very much for taking the time to answer my question, it’s very much appreciated :).
Hi @Mikeyt34,
Not to be a naysayer, but you are still subject to currency exchange risk.
If the dollar/euro rate changes a lot, you will gain/lose based on that in addition to the movement of the stock.
Quite a while back, 2008 maybe, someone in Germany was talking about this. The stock lost money but the exchange rate mostly eliminated his loss.
Does that help you?
Gene
All holdings and some statistics on my Fool profile page
https://discussion.fool.com/u/gdett2/activity (Click Expand)
This is a very important point because the strong dollar has hammered international investment returns for US investors in the past few years. That has changed a little bit this year with the dollar weakening.
Hi Gene,
My belated thanks for replying to this and yes, I am well aware of the exchange rate risk on things like this.
Yes there is definitely a risk in it
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Define “failure.”
The worst example in Europe is hyperinflation in Germany in the 1920s. Currency became more valuable as scrap paper than as money. Hoechst reported values changed so quickly they were unable to close their books. They
switched to a barter economy. They made soap, paid their employees in soap. And exchanged soap for raw materials.
Hyper inflation could make your stock worthless. But it still has value in assets that should translate into value in some new currency. Hard assets like buildings and real estate retain value although the numbers can be crazy for a while.
MALONE: So there’s Barry, shoe factory, 1992, maybe standing under a picture of V.I. Lenin. And he starts talking to the head of the factory.
ICKES: And he pulls me to the window, and he points across the yard. And across the yard is this - like, half a city block. And this city block is just a pile of bricks. He says, that’s all my savings. You know, this is what I’ve done, you know, because bricks - people need bricks. I can pay for it in bricks.
BLANCHARD: Way more valuable than a stack of rubles in a vault somewhere.
ICKES: Yes.
https://www.npr.org/2022/04/01/1090312774/when-bricks-were-rubles
I guess they’ll just do the usual!