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

The currencies to bet on this year
Currencies

The currencies to bet on this year

The US dollar could be set to weaken this year, while the euro, Canadian dollar and the Swiss franc could be good bets for optimistic traders.
17 Jan 2020
Why Wall Street has got the US economy wrong again
Economy

Why Wall Street has got the US economy wrong again

The hiring slowdown does not signal recession for the US economy. Growth is just moving down a gear, says Brian Pellegrini.
25 Oct 2019
Central banks want politicians to take charge – but what will they do?
US Economy

Central banks want politicians to take charge – but what will they do?

The US Federal Reserve has come to the end of the road in terms of what it can do to accelerate any recovery, says John Stepek. It's over to the polit…
17 Sep 2020
Jerome Powell’s pivotal moment in monetary policy history
US Economy

Jerome Powell’s pivotal moment in monetary policy history

The Federal Reserve – America's central bank – has said that its inflation target of 2% will now be a long-term average, rather than a rate to be hit …
3 Sep 2020

Most Popular

How the stamp duty holiday is pushing up house prices
Stamp duty

How the stamp duty holiday is pushing up house prices

Stamp duty is an awful tax and should be replaced by something better. But its temporary removal is driving up house prices, says Merryn Somerset Webb…
25 Sep 2020
Can Rishi Sunak’s winter plan save the UK economy?
UK Economy

Can Rishi Sunak’s winter plan save the UK economy?

With his Winter Economic Plan, chancellor Rishi Sunak is hoping to support the economy through the dark months ahead as restrictions tighten again. Jo…
25 Sep 2020
The electric-car bubble could get an awful lot bigger from here
Renewables

The electric-car bubble could get an awful lot bigger from here

The switch to electric cars is driving a huge investment bubble. But that’s not necessarily a bad thing, says John Stepek. Fortunes will be made and l…
24 Sep 2020