Euro Nears Parity With Dollar: What Investors Need to Know

NEW YORK (TheStreet) -- The euro is moving closer to parity with the dollar as the U.S. and European economies diverge, adversely affecting companies that are sensitive to a strong dollar.

Commodity sectors, linked to gold and oil, have declined as the dollar has risen. Commodities are priced in dollar terms and become less expensive as the dollar index increases. Market Vectors Gold Miners ETF (GDX) and Energy Select Sector SPDR (XLE) have each declined over 10% since June and could see continued selling as the dollar further increases.

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Meanwhile, Utilities Select Sector SPDR (XLU) has lagged the SPDR S&P 500 (SPY) since May, falling close to 9%, as the expectation for higher U.S. interest rates has weighed on company share prices. Utility stocks are known for their large dividend payouts as they tend to be more stable, slow-growth companies. Similar to how bonds react when interest rates rise, utility stocks fall as their dividend yields become less attractive in the face of higher rates.

Comments by European Central Bank President Mario Draghi on Thursday showed that policymakers are willing to do whatever it takes to return the euro area economy to growth. In contrast, the Federal Reserve meeting last week proved that the central bank would likely begin raising short term rates by summer of next year. As statements from the two central banks have differed in tone, the dollar has been pushed higher, hurting interest rate sensitive sectors.

In an interview on Thursday with Lithuanian business daily Verslo Zinios, Draghi pledged to do what was needed to help the euro area recover from its current decline.

"We stand ready to use additional unconventional instruments within our mandate, and alter the size or composition of our unconventional interventions should it become necessary to further address risks of a too prolonged period of low inflation," Draghi was quoted as saying.

These comments pressured the euro, as economic growth for the area reached 0% in the second quarter, while the region's annual inflation rate remains below 0.5%, showing that more stimulus is likely. Moreover, Draghi added that heightened geopolitical tensions could dampen business and consumer confidence.

Taking a slightly different tone, Fed Chair Janet Yellen said last week during its September policy meeting that the Fed would keep interest rates low for a "considerable time" after ending the Fed's large-scale asset purchase plan. With asset purchases likely ending in October, that pegs the start date for Fed rate hikes at the summer of next year.

Many analysts have argued that weak U.S. inflation and continued issues with the labor market might delay such rate hikes, but the consensus remains that rates will rise at some point in 2015.

Although there are questions regarding the health of both economies, the U.S. economy's relative strength over its European counterpart is less debated.

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U.S. economic figures are trending higher albeit at a gradual pace, while euro area data is steadily declining. This has pushed the euro down close to 9% since May, from 1.375 to 1.258. As the dollar strengthens, pushing towards parity with the euro, U.S. equity sectors sensitive to a stronger dollar have fallen.

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

Follow @macroinsights

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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