European stocks face pain as euro nears $1.50

PARIS (Reuters) - The euro's steady march up toward an exchange rate of $1.50 is reviving concerns over the impact on European exporters' results and will likely break the strong correlation between the single currency and euro zone equities seen in recent weeks.

Shares in aerospace firms and other exporters producing in the euro zone and selling in the United States are seen as the most vulnerable stocks, while exporters with a strong exposure to emerging economies -- whose currencies have also rallied against the dollar -- should be less affected.

European stocks, which have shown resilience this year in the face of Japan's nuclear crisis, unrest in the Arab world, Portugal's bailout and talks of a Greek debt restructuring, have been rallying hand-in-hand with the euro over the past seven weeks.

But as the single currency hit a 17-month high of $1.4903 on Monday -- up 15 percent since early January -- euro zone stock markets are getting close to the pain threshold at which companies and analysts will have to adjust their earnings forecasts.

"Around $1.50, it becomes a real problem for euro zone exporters. By the third quarter, we will probably see companies talking about it when they release results," said Frederic Dodard, head of multi asset class solutions at State Street Global Advisors France.

Over the past year European markets have been rocked by the region's debt crisis, and during respite moments when the euro rallied, stocks followed suit as risk appetites rebounded, with a number of foreign investors seen playing the strong positive correlation between the euro and euro zone equities to determine buy-and-sell signals for stocks.

The 30-day rolling correlation between the single currency and the euro zone's blue chip Euro STOXX 50 .STOXX50E index, which has a 20-year average of -0.1, peaked at +0.61 last week and looks poised for a reversal.

"North of $1.50 we're out of the comfort zone," a Paris-based trader said.

"Not that the whole market will turn bearish, but people will become reluctant to buy exporters' shares, at least until we see how bad the damage is on their results."

Philippe Nahum, head of Paris-based B*Capital, said the euro's rally has caught a number of companies off guard, and some of them might not have hedging programs in place to limit the impact.

"That being said, stocks are not affected all in the same way. European firms producing in the euro zone are penalized because they lose competitiveness ... But others which produce outside the euro zone and sell in the zone will be the winners," he said.

"If the euro rally goes on the market will shun European exporters such as EADS (EAD.PA) and companies that haven't delocalized in the dollar zone."

Shares of the parent of Airbus planemaker EADS, whose chief executive Louis Gallois has said in the past that every 10 cents rise in the euro against the dollar costs the company 1 billion euros in annual operating profits, have fallen 3.5 percent over the past week as the euro raced higher and worries of a strong euro resurfaced on traders' radars screens.

Franck Nicolas, head of global asset allocation at Natixis Asset Management, says German exporters with a strong exposure to emerging markets are less affected by the rallying single currency.

"German exports such as durable goods that are sold in emerging markets are less sensitive to the exchange rate between the euro and the dollar, in part because the dollar has also been falling against all the other currencies," Nicolas said.

(Additional reporting by Alexandre Boksenbaum-Granier; Editing by Greg Mahlich)