Will the buck stop here?

The ever strengthening dollar has hit overseas sales for America's S&P 500 companies.

756-dollar-index-634

The US dollar is up by 20% in trade-weighted terms (measured against a basket of its major trading partners' currencies) over the past year, and is close to a 12-year high (see chart). This has been good for American travellers.

But it has hit overseas sales for S&P 500 companies, who now look set to forfeit around $100bn of revenue this year, more than the total earned by Nike, McDonald's and Goldman Sachs combined, say Eric Platt and Kadhim Shubber in the Financial Times.

The dollar bull has undermined commodities, which are priced in the US currency. This in turn has hit growth in emerging markets, some of which are also being squeezed by the rising cost of dollar-denominated debt or by pegging their currency to the dollar (which will make their currencies rise too). Unfortunately for emerging markets and US multinationals, these trends may endure as the dollar climbs further.

The currency markets "tend to have very, very long cycles", says BK Asset Management's Boris Schlossberg. Deutsche Bank says that only the Japanese yen and Norwegian krone have weakened as much against the dollar at this point, as during the last two major dollar bulls, in the 1980s and 1990s. That suggests further upside.

The fundamentals point the same way. Even if the jitters surrounding China's devaluation of the yuan delay the first increase in US interest rates in almost a decade, the basic picture hasn't changed: America is gradually moving towards tightening monetary policy, while none of its major rivals are, except the UK.

Indeed, the European Central Bank and the Bank of Japan could print more money if they grow more concerned about undershooting inflation targets. China is now weakening its currency. Emerging markets are grappling with structural problems and the prospect of capital leaving their traditionally risky shores, due to the lure of higher yields on US securities. In recent years, moreover, America has reined in its budget and current account deficits, which is also bullish for the currency.

In short, "the dollar definitely has a tailwind behind it", says Schlossberg. Morgan Stanley thinks the dollar is especially likely to perform well against commodity and emerging market currencies and that it will climb to parity with the euro by the end of next year, a rise of 10% from current levels.

Recommended

Inflation looks likely to take off this year – but there’s one key risk
Inflation

Inflation looks likely to take off this year – but there’s one key risk

With the world’s governments spending money hand over fist, inflation looks certain to take off at some point. But China could change all that. John S…
19 Jan 2021
Forget austerity – governments and central banks have no intention of cutting back
Global Economy

Forget austerity – governments and central banks have no intention of cutting back

Once the pandemic is over will we return to an era of austerity to pay for all the stimulus? Not likely, says John Stepek. The money will continue to …
15 Jan 2021
Will America’s “healthy reflation” end in inflation?
US stockmarkets

Will America’s “healthy reflation” end in inflation?

Democratic control of the US Congress would give Joe Biden huge scope to stimulate the economy. But willie mean a “healthy reflation” for the economy …
8 Jan 2021
23 December 1913: The US Federal Reserve is created
This day in history

23 December 1913: The US Federal Reserve is created

After much debate, Woodrow Wilson finally signed the bill that would create the US Federal Reserve on this day in 1913.
23 Dec 2020

Most Popular

Prepare for the end of the epic bubble in US stocks
US stockmarkets

Prepare for the end of the epic bubble in US stocks

US stocks are as expensive as they’ve ever been. How can you prepare your portfolio for a bubble bursting?
18 Jan 2021
Bitcoin: fool’s gold or the new gold?
Bitcoin

Bitcoin: fool’s gold or the new gold?

With bitcoin hitting new highs last week, and close to becoming a mainstream investment, is it really gold for the 21st century?
15 Jan 2021
It's not just the UK – we're seeing pandemic housing booms across the globe
Property

It's not just the UK – we're seeing pandemic housing booms across the globe

Soaring house prices aren’t just a UK thing, they’re a worldwide phenomenon. And it’s no coincidence – the underlying cause is much the same. John Ste…
18 Jan 2021