Euro May Suffer in Potential Fallout From VW Emission Crisis

  • Analysts say scandal may hinder exports by Germany, region
  • Shared currency is down 7 percent this year versus dollar

Volkswagen AG’s diesel scandal is big enough that some analysts are saying it has the potential to damage the euro.

The widening crisis sent the firm’s shares plunging by almost 40 percent earlier this week, dragging European equities lower. The scandal may reverberate through the currency market by undermining confidence in Europe’s largest economy in the short term and damaging the reputation of the nation’s products. Overseas cars sales accounted for almost 18 percent of German exports last year.

“It’s unusual for events in a single company to become a driver of global markets, but that’s what is happening now with Volkswagen,” Kit Juckes, a global strategist at Societe Generale SA in London, wrote in a note. “The woes of the world’s second-biggest car manufacturer are doing nothing for economic optimism or risk appetite and they are undermining the euro, against both dollar and yen.”

German’s benchmark DAX index rebounded 0.4 percent Wednesday after sliding 3.8 percent Tuesday. The euro is down more than 7 percent versus the dollar this year. It was up 0.7 percent at $1.1195 as of 2:23 p.m. in New York.

“If it does have a material impact in terms of trade assumptions going forward, then that would suggest that there would be slightly fewer positive euro influences over the medium term,” said Jeremy Stretch, a foreign-exchange strategist at Canadian Imperial Bank of Commerce in London.

Martin Winterkorn, the VW’s chief executive officer, resigned Wednesday in the wake of the crisis.

Cars are the backbone of Germany’s export prowess, with autos produced by companies such as Volkswagen, Daimler AG and Bayerische Motoren Werke AG. Volkswagen, which means “people’s car,” is one of the icons of German industrial might since World War II.

“The integrity of the German economy has been built largely on the back of engineering excellence, a strong trade position and growth in the manufacturing sector,” Stretch said. “We’re seeing that reputational bias, which has been incredibly positive for Germany, but also has been demonstrated in terms of the exceptionally positive trade and current account position, potentially being put at risk by the reputational damage of current events.” 

The Volkswagen scandal is the latest event to dent confidence in European financial markets following the Greek debt crisis during the summer. Over the past year, the euro has declined 13 percent against the dollar as the European Central Bank carried out unprecedented easing while the U.S. moved closer to raising interest rates.

“If the reputational damage begins to translate into much slower sales for VW globally, the knock on effects for Germany and the euro zone could be very unpleasant,” Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management in New York, wrote in a note. “This suggests that the ECB will have to maintain a highly accommodative monetary policy for the time being in order to offset any shocks to demand.”

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