The strengthening of the US dollar may hurt companies with a global footprint, but it benefits those who rely on imports.
A strong dollar is a thorn in the side of American companies with a global presence. When the dollar is strong, revenues earned abroad translate into fewer dollars here. Furthermore, US products are becoming increasingly expensive for international consumers. The dollar has gained more than 14% against a basket of foreign currencies over the last year, according to the US Dollar Index (DXY). If inflation remains high, more Fed rate hikes to cool the economy and tame prices will almost certainly push the dollar higher.
This has begun to eat into corporate profits in the United States.
During the second quarter earnings season, companies such as Johnson & Johnson (JNJ), IBM (IBM), Microsoft (MSFT), Netflix (NFLX), and Salesforce.com (CRM) lowered their earnings forecasts due to a stronger dollar. According to investment firm LPL Financial, companies in the benchmark S&P 500 index generate approximately 30% of their revenue outside of the United States. “We estimate that currency reduced S&P 500 revenue by 2 to 2.5 percentage points in the second quarter,” says Jeff Buchbinder, chief equity strategist at LPL.
According to Buchbinder, when the dollar rises, emerging market securities suffer because many of those countries corporate and government bonds are denominated in dollars, making debt service more difficult. They may also pay more for commodities priced in dollars, such as oil. The MSCI Emerging Markets Index (IEMG) is down more than 20% for the year ending July 29.
Who Benefits from a Strong Dollar?
A strong dollar gives Americans more buying power when traveling and trading overseas. This makes it cheaper for Americans to purchase foreign goods and services, and it also makes it easier for American companies to compete in global markets. In addition, a strong dollar tends to attract foreign investment in the United States, which can boost the economy by creating jobs and stimulating economic growth.
Who Loses from a Strong Dollar?
A strong dollar can have negative consequences for certain groups of people. For example, it can make it more expensive for Americans to buy imported goods, which can lead to higher prices and reduced competition in the domestic market. In addition, a strong dollar can hurt export-dependent industries, since it makes American products more expensive abroad. This can lead to job losses and reduced economic growth.
Strong-dollar winners include U.S. businesses that rely on imports and will benefit from lower costs as the dollar strengthens, according to Mitch Zacks, portfolio manager at Zacks Investment Management. When the dollar rises, U.S. companies that generate most of their revenue domestically, such as many small-company stocks and utilities, can do well. Of course, American consumers, particularly those planning a vacation abroad, can stretch the value of the dollar in terms of both travel costs and purchases of goods and services abroad.
Who Loses from a Strong Dollar?
A strong dollar can have negative consequences for certain groups of people. For example, it can make it more expensive for Americans to buy imported goods, which can lead to higher prices and reduced competition in the domestic market. In addition, a strong dollar can hurt export-dependent industries, since it makes American products more expensive abroad. This can lead to job losses and reduced economic growth.
However, Zacks warns investors against putting too much weight on the dollar when making broad tactical portfolio decisions. He observes that the stock market has performed well in both strong and weak dollar environments. From 1995 to 2000, when the S&P 500 index returned more than 21% annualized, the rising dollar coincided with one of the best periods for US stocks. During the brutal 2008 bear market, it was also on the rise. In contrast, a general weakening dollar coincided with a relatively strong market from 2003 to 2006.