It sounds odd for German companies to be in a “euphoric” mood while the euro has been on a tear higher, but there are solid factors behind that uplifted frame of mind, analysts say.

Concerns that a stronger euro will hurt big exporters in Europe’s largest economy have been reflected in the DAX 30 DAX, -1.12% The German stock benchmark slumped 1.7% last month, helping to drive down its year-to-date gain to 6%.

However, “there are fundamental reasons why German industry is not too worried about the strengthening of the euro,” said Carsten Brzeski, chief economist at ING.

In July, German companies were “euphoric” about their prospects, the Ifo Institute for Economic Research said as it released results of its widely watched business climate survey, which hit a record level.

“German exporters are in high spirits,” Ifo wrote in a separate report. “The euro’s appreciation is obviously having no negative impact.”

That bullishness came even after a rise in the euro EURUSD, -0.0511%  , which has charged up more than 12% against the U.S. dollar in 2017. It recently traded above $1.18, its strongest level in two-and-a-half years.

Euro strength can cut into the competitiveness of exported goods, as it can make them more expensive for overseas clients using other currencies to purchase and so lead to lower sales. As well, euro strength can eat into the profit made by multinational dollar earners.

Brzeski suggests there’s one key thing investors should remember when assessing the impact of strength in the shared currency on German companies’ stocks.

“The euro is still historically low,” the ING economist told MarketWatch. “There’s a pain threshold for German industry,” but “it’s still far, far off.”

That pain threshold against the greenback has typically been around $1.35, he said. The euro hasn’t traded there since July 2014. It is also well below its all-time high of $1.6040, which it hit in July 2008.

Credit Suisse at the end of last month noted the euro had been down about 12% against the dollar in terms of purchasing-power parity, a measure of valuing currencies.

Still, Credit Suisse expects the euro to rise to $1.22 on a 12-month basis, prompting its strategists to turn slightly less upbeat on European equities. They say they’ve pared their “overweight” rating on the region, but still support tilting portfolios toward Europe’s stocks.

Popular funds for betting on Germany include the iShares MSCI Germany ETF EWG, -0.74%  , which has $5 billion in investor money, and the iShares Currency Hedged MSCI Germany ETF HEWG, -0.59%   , which has about $800 million in assets under management.

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Very informative
05-03 04:23 by Liam
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