A strong dollar is a thorn in the side of U.S companies with a global footprint. Revenues earned overseas translate into fewer greenbacks here when the dollar is strengthening. And U.S. products become increasingly pricey for consumers abroad. Over the past year, the dollar is up more than 14% against a basket of foreign currencies, as measured by the U.S. Dollar Index (DXY (opens in new tab)). And if inflation stays high, more rate-hiking from the Federal Reserve to cool the economy and tame prices would likely push the dollar even higher.
That has started to put a dent into U.S. corporate profits.
During the second quarter earnings season companies including Johnson & Johnson (JNJ (opens in new tab)), IBM (IBM (opens in new tab)), Microsoft (MSFT (opens in new tab)), Netflix (NFLX (opens in new tab)) and Salesforce.com (CRM (opens in new tab)) have trimmed their outlooks for business results because of a beefier buck. Companies in the benchmark S&P 500 index generate about 30% of their revenues outside the U.S. according to investment firm LPL Financial. “We estimate that currency took perhaps 2 to 2.5 percentage points out of S&P 500 revenue in the second quarter,” says Jeff Buchbinder, chief equity strategist for LPL.
Emerging markets securities typically take a hit when the dollar climbs because many of those nation’s corporate and government bonds are denominated in dollars, says Buchbinder, making it harder to service that debt. They might also pay more for commodities such as oil, which are priced in dollars. For the year ending July 29, the MSCI Emerging Markets index (IEMG (opens in new tab)) is down more than 20%.
Strong-dollar winners include U.S businesses that rely on imports, and therefore will see some cost relief as their dollar goes further, says Mitch Zacks, portfolio manager at Zacks Investment Management. U.S. companies that garner the lion’s share of revenues domestically, including many small-company stocks and utilities, can do well when the dollar is rising. And of course, U.S. consumers, especially anyone planning a vacation abroad, can stretch the value of the dollar in terms of both traveling costs and buying goods and services abroad.
But Zacks cautions investors from giving the dollar too much weight in making broad tactical portfolio decisions. He notes that the stock market has done well in both strong- and weak-dollar periods, broadly speaking. A rising dollar coincided with one of the best periods for U.S, stocks, from 1995 to 2000, when the S&P 500 index returned more than 21% annualized. It was also on the rise during the brutal 2008 bear market. Conversely, a generally weakening dollar during 2003-2006 corresponded with a relatively strong market.
Anne Kates Smith brings Wall Street to Main Street, with decades of experience covering investments and personal finance for real people trying to navigate fast-changing markets, preserve financial security or plan for the future. She oversees the magazine's investing coverage, authors Kiplinger’s biannual stock-market outlooks and writes the "Your Mind and Your Money" column, a take on behavioral finance and how investors can get out of their own way. Smith began her journalism career as a writer and columnist for USA Today. Prior to joining Kiplinger, she was a senior editor at U.S. News & World Report and a contributing columnist for TheStreet. Smith is a graduate of St. John's College in Annapolis, Md., the third-oldest college in America.
The Divorce Gap: Unique Retirement Issues for Women Over 50
The shocking loss of income and retirement savings that disproportionately affect divorced women is a big challenge – especially for those over 50.
By Stacy Francis, CFP®, CDFA®, CES™ • Published
4 Steps for Managing Income Withdrawals in Retirement
Investing for Income How Roth IRA conversions can help you minimize your taxes in retirement, extending the life of your savings.
By Kyle Hammerschmidt, Investment Adviser • Published
This New Sustainable ETF’s Pitch? Give Back Profits.
investing Newday’s ETF partners with UNICEF and other groups.
By Ellen Kennedy • Published
As the Market Falls, New Retirees Need a Plan
retirement If you’re in the early stages of your retirement, you’re likely in a rough spot watching your portfolio shrink. We have some strategies to make the best of things.
By David Rodeck • Published
Where the Midterm Election Races Stand Today
Economic Forecasts In a tight race, these state elections may make the difference when midterm results are announced in November.
By Sean Lengell • Published
FedEx (FDX) Earnings Warning: Recession Harbinger or Single-Stock Hiccup?
Markets When a firm as big and broad-reaching as FedEx forecasts a sharp earnings drop, the market’s going to react. What’s this say for upcoming earnings?
By Anne Kates Smith • Published
The White House Touts A Digital Dollar: What Does That Mean?
cryptocurrency A CBDC, or Central Bank Digital Currency, is a step closer in the U.S., but going digital will take years.
By Ellen Kennedy • Published
What Ethereum's 'Merge' Means for You, the Market, and the Climate
cryptocurrency The "Merge" seems to have worked. What you need to know about crypto's biggest story of 2022.
By Rodrigo Sermeño • Published
Why a Target-Date Fund Works for Me
investing Target-date funds are attractive for their simplicity. And while I've invested in one in the past, that doesn't mean it's the right choice for you.
By Lisa Gerstner • Published
How to Spend $1,000: Find Cheap (or Free) Online Courses to Build Career Skills
Smart Buying There's a huge array of skill-building online courses that can level up your career for under $1,000.
By Kim Clark • Published