"In theory, a 10 percent strengthening in the euro/usd should see a 5 percent cut to year-end earnings per share forecasts, thereby justifying the aforementioned 5 percent stock market decline," the report states, adding, that in practice, no change has been made to the bank's year-end EPS (earnings per share) growth forecast from the strengthening of the currency. EPS is the portion of a company's profit allocated to each outstanding share of common stock.
The euro is currently trading at $1.19 against the dollar, after hitting a two-and-a-half year high on the back of a weaker dollar and on political risks easing in the euro zone. The common currency is up nearly 14 percent since the start of the year and some analysts had warned that a stronger euro could knock a few percent off earnings.
In a recent report, UBS analysts wrote that a stronger euro could knock up to 3 percent off earnings. "If currencies stay stable, we think (the trade-weighted euro) will peak out up around 6 percent year-on-year in (the first quarter of) 2018, meaning around 2 to 3 percentage points off earnings per share (EPS) growth," said Nick Nelson, Karen Olney and Joao Toniato, strategists for UBS in an equity strategy note published last month.