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Analysis - European exporters to hurt if euro breaches $1.50

Reuters) - European exporters have so far survived the euro's recent gains, with German industrials among the most resilient, but a break above $1.50 will likely hit defence and technology firms hard.


Currency volatility has prompted firms to employ more active strategies to absorb foreign exchange-related shocks to their profits, particularly as the dollar is expected to continue suffering on speculation of further U.S. quantitative easing.

The euro hit a nine-month high against a broadly weak dollar around $1.4150 last month. So far this year, the single currency has traded in a volatile range of roughly $1.19 hit in June and $1.46 struck at the beginning of the year.

"We have to bear in mind that Europe is very used to dealing with a strong euro, but if we go back up to say $1.50 that will start to cause quite a bit of pain for selected companies," said Thomas Beevers, a fund manager at Newton Asset Management.

Analysts said defence firms which have a large euro cost base would be hit hardest by the euro's rise to $1.50, a level last seen in late 2009, with technology firms also at risk due to fierce competition from the United States.

"The (European) sectors that are most at risk are the ones where the Americans are actually strong like defence, IT and software but not in machinery or cars," said Lothar Mentel, chief investment officer at Octopus Investments.

EADS, which earns around 75 percent of its revenue in U.S. dollars, looks particularly vulnerable as a weak dollar hurts competitive pricing and margins at its Airbus unit.

"Given that each 1 U.S. cent movement in the effective rate (after hedging) impacts (EADS) EBIT by 100 million euros... the recent 10 cent movement is worrisome," Citigroup analysts wrote.

In the tech space, firms such as SAP and Nokia are vulnerable to competition from U.S. counterparts Apple and Oracle, Mentel said, and could lose out in terms of pricing to emerging markets.


Analysts see the larger German exporters as more resilient to FX fluctuations, having adapted their businesses to absorb currency strength from the days of the deutschemark.

"German firms have had many decades of dealing with a strong currency. In the last 10 years they have remained competitive in a global market place by keeping a lid on wages and cost-cutting," Beevers said, citing Siemens as an example.

Despite the euro having some room to appreciate before exporters start feeling a real pinch, investors may be swayed to reassess their holdings as valuations creep up.

"The exporters have had a strong run this year. We think the currency is a reason for some caution so wouldn't put more money into the names but we wouldn't aggressively sell either," said Graham Secker, European equity strategist at Morgan Stanley.

Thomson Reuters data shows EADS's forward price-to-earnings (P/E) is at 17, and Safran at 17.2, greater than STOXX Europe 600 industrial goods and services index's 15.45