The Coming Week in Europe: Euro Back on the Ropes Following Rate Hike - TheStreet

BERLIN -- Foreign-exchange traders must hate the euro.

Sheer loathing on their part would certainly be the easiest way to explain the beleaguered currency's latest dive vs. the U.S. dollar. While the euro experienced a brief rally over the summer, the decision by the

European Central Bank

to raise interest rates by 25 basis points to 4.5% last Thursday drove it to all-time lows just above 88 cents.

Go figure.

Normally, higher borrowing costs bolster a currency's position on the forex markets, unless the market thinks a rate hike hurts the prospects for an economy's future growth. And although the hike was widely expected and there's plenty of evidence that the eurozone's economy is healthy, giddy currency traders apparently thought Europe's monetary authorities had hurt the chance for future growth and so sold the euro lower last week.

For the coming week, the euro's shaky position could mean a rough time for the Continent's politicians and central bankers as they try to spin the recent rate hike and talk up the euro. They'll certainly be looking for any signs of strength in the week's economic releases. U.S. investors, however, can use the renewed euro weakness as another opportunity to take a look at European stocks where they'll get more bang for their buck.

As the euro's latest plunge proves, betting on the whims of the international currency markets is dicey at best. But for investors with the appropriate intestinal fortitude, buying shares in top European companies -- whether it be techs such as

Epcos

(EPC) - Get Report

, Old Economy issues like

E.ON

( EON) or telcos such as

Telefonica

(TEF) - Get Report

-- could give them an added forex premium once the euro appreciates against the dollar, as is ... um ... widely expected to

eventually

happen.

Skeptics would say the euro has a long way to go to shake off its poor image and gain ground against the greenback. But for as long as the euro has languished vis-a-vis the dollar, prospects for Europe's economies have rarely looked better. Growth for the euro area is expected to top 3.5% this year, and many of the Continent's export-led economies -- in particular that of heavyweight Germany -- will continue to reap benefits from the euro's weakness as their goods remain relatively cheap overseas.

Besides closing the growth gap with the U.S., the ECB should continue to narrow the difference in interest rates as well, since the

Federal Reserve

appears likely to be on hold until after the Presidential elections in November. The ECB could hike rates by as soon as next month, which could help the euro off the ropes -- so long as the increase doesn't again raise fears about stunting growth and irreparably dent European business confidence.

Some investors don't think the ECB will hike rates again and are already preparing for an autumn rally. "The interest-rate environment argues for a considerable improvement in sentiment," says Robert Halver, an equity strategist for

Delbrueck Asset Management

in Frankfurt. He thinks the markets will start to take off, "propelled by interest-sensitive financial issues" once it's clear that tightening cycles in the U.S. and the eurozone are, for the most part, over. "Even in Europe, only an additional 25 basis-points increase is expected," he says.

Months from now, after the ECB actually

is

through with its tightening cycle, euro supporters can, of course, only hope the fickle foreign-exchange traders don't then decide to sell the poor currency lower, arguing there are no more rate hikes in the offing.