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September 30, 2014

A Strong Dollar Could Be Good News to Stocks

By Politics Research Team at Wall Street Daily

Just this past Friday, the U.S. dollar posted 11 straight weekly gains against other major currencies, growing 4.6% in the second quarter.

But with the American dollar making headway, investors are worrying that U.S. corporate earnings will get hit.

And here’s why…

The dollar’s growth is attributed to the belief that we’re in recovery mode and, in the first half of next year, the Federal Reserve will hike interest rates. As we know, higher interest rates mean attractive returns for foreign investors.

But in the same breath, that very same strong dollar could squeeze profits for the firms with a fair amount of revenue coming from overseas.

Growing or Shrinking?

Though the U.S. dollar is prospering, when companies book foreign revenue as profits, they must convert the sales in the weaker foreign currency to the strong U.S. dollar.

So, the more the dollar grows, the more and more foreign currency is needed to make that conversion, creating a bigger toll for hitting a stronger bottom line.

In fact, some companies are already feeling the pinch from the stronger dollar. Greg Harrison, Senior Research Analyst at Reuters, tracks earnings for the S&P 500 companies, and he noticed, 
“The stronger dollar has had a greater effect this year as companies have given negative guidance.”
In fact, there’s been more negative guidance this year than usual, being a frequently cited factor.

Impact on Stocks

But as far as stocks are concerned, it’s all about outperforming Wall Street forecasts. While most analysts are considering the currency hit, John Manley, Chief Equity Strategist of Wells Fargo, votes that the companies will get a pass.

“Unless people look out and say this is going to be here for a long, long time, they tend to forgive a few pennies one way or another if the corporation transmits the news clearly.”

Past economic patterns prove technology, pharmaceuticals, gold, metals, and mining to be very sensitive to the strong dollar. On the contrary, insurance brokers, homebuilding, and airlines do better with a strong buck.

Overall, large-cap stocks tend to fare well, as foreign investor dollars pile into big, well-known American names. So, analysts don’t predict any major, long-term negative shifts.

Courtesy Wall Street Daily (EconMatters article archive Here)  

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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