An expensive U.S dollar
DXY, +0.44%
has continued to weigh on the earnings of U.S. companies that sell abroad, and despite complaints of unfavorable exchange rates from President Donald Trump, there’s little reason to expect this to change soon, analysts say.
Several big name companies, including Nike Inc., Harley Davidson and United Technologies have pointed specifically to a strong U.S. dollar as a headwind for second-quarter earnings, with the U.S. dollar index averaging a level of 97.32 in the second quarter of 2019, or a 4.7% increase from the 92.66 level averaged in the second quarter of 2018.
“The dollar strength year over year will continue to be a headwind for earnings this quarter,” Michael Arone, chief investment strategist at State Street Global Advisors told MarketWatch. He added that while many companies hedge their currency risk, given that 40% of S&P 500 have exposure from outside the United States, dollar strength is nonetheless an important factor for investors to watch.
Savita Subramanian, chief equity and quant strategist with Bank of America estimated in a recent note to clients that currency headwinds subtracted 1.7 percentage points from S&P 500 sales in the second quarter. Though that’s down from 2.1 percentage points in the first quarter, a sharp reversal from last year, when exchange rates were a bigger headwind for stocks, adding to U.S. companies struggles with year-over-year growth.
Analysts are split as to whether the dollar headwind is one that American corporations will have to contend for the foreseeable future. Paresh Upadhyaya, director of currency strategy at Amundi Pioneer Investments wrote in a Tuesday research note that “The US has unofficially abandoned its strong USD policy with regular verbal intervention,” including recent tweets by President Trump complaining that trading partners Europe and Japan have helped their domestic businesses by achieving better exchange rates.
Upadhyaya cites the Trump Administration’s jawboning on exchange rates as one reason that he sees a “strong likelihood” that the U.S. dollar will decline over the next year.
Arone, however, argued that with the Federal Reserve acting independently of the White House and Congress, with U.S. economic growth projected to continue to outpace the rest of the developed world, and foreign central banks expected to continue to maintain easy monetary policy, it’s tough to see why the U.S. dollar should depreciate significantly from here.
“It’s that classic market saw that the dollar has become the best house in a bad neighborhood, Arone said. “ With Brexit, with the lack of economic growth in Europe and Japan and the slowdown in the Chinese economy, the dollar is perceived as having solid properties.”
Meanwhile, despite the president’s complaints, his economic policy, including higher tariffs on imports, is contributing to the strong dollar, by making foreign goods more expensive to buy than those produced in the U.S, Arone said. “For an administration that complains about dollar strength, tariffs aren’t helping,” he said.
Source : MTV
