Stronger Dollar Spells Bad News for Stocks, Oil & Gold

A booming buck is good for national pride, but bad for investors

   

If there really is a global currency war going on, it looks like the U.S. is losing — at least so far in 2013.

Sure, most people think a strong dollar is good news, if only for national pride, what it signals about economic strength and the fact that it makes traveling abroad cheaper.

But the Federal Reserve and companies with lots of overseas sales want the dollar to be weak against other currencies. That makes exports cheaper and more attractive to foreign buyers. It also means revenue gets a boost from foreign exchange, since the stronger overseas currency converts into a greater number of greenbacks.

And certainly investors in commodities like oil and gold want a weak dollar, because they’re priced in dollars. When the greenback goes up, the price of good denominated in dollars tends to go down.

So it’s something of a concern that the dollar has been rising sharply for the year-to-date when measured against a basket of major currencies — the effects of which could become a headwind for everything from stocks to commodities to major emerging markets like Russia, Brazil and South Africa.

For much of the past two years, the dollar was struggling to stay down vs. the euro — an all-but-impossible challenge with crisis, panic and recession gripping the continent. But after bouncing off a low of $1.20 in the past 52 weeks, the euro has rebounded sharply, spending almost all of 2013 above $1.30.

Too bad so many other currencies haven’t been as accommodating. The U.S. Dollar Index, which measures the greenback against a basket of major currencies, has jumped 5% YTD — a huge move in currency terms.

If there’s a silver lining, it’s that the dollar is still below its pre-recession and financial crisis levels. But this bout of strength is worrisome nonetheless. Have a look at the chart, courtesy of Trading Economics, tracking the dollar index since 2007:

USD since Jan 2007 DXY Stronger Dollar Spells Bad News for Stocks, Oil & Gold

Japan is among the main culprits for the stronger dollar so far this year. Its central bank has launched a program of monetary stimulus that makes Fed Chairman Ben Bernanke look like a wuss. That program has the yen trading decisively above $100 for the first time since 2008.

But plenty of other currencies are also playing their part, and it’s taking a bite out of U.S. corporate revenue.

In Latin America alone — an increasingly important emerging market for U.S. goods and services — Brazil and Colombia have been tamping down the real and peso by slashing interest rates and buying up dollars. Venezuela, for its part, just up-and-outright devalued the bolivar against the dollar by nearly a third.

Sure enough, U.S. corporate revenue — which is already struggling because weak demand in Europe is more than offsetting the effects of a stronger euro — is bearing the brunt of the currency war.

Colgate-Palmolive (NYSE:CL), DirectTV (NASDAQ:DTV), 3M (NYSE:MMM), Avon (NYSE:AVP) and Philip Morris (NYSE:PM) are just some of the big names reporting forex damage in the most recent quarter. Indeed, companies in the S&P 500 derive 34% of their revenue from outside the U.S., meaning a persistently stronger dollar will be a serious impediment to aggregate top-line growth.

It also doesn’t help commodities traders or countries dependent on exports priced in dollars. Oil prices already are under pressure from a global supply and demand imbalance, and a stronger dollar isn’t doing any favors for traders or oil nations like Russia.

Meanwhile, the selloff in gold is hurting gold bugs, as well as emerging markets from South Africa to Peru. There’s more to the gold funk than the suddenly resurgent greenback, but it’s certainly not helping matters.

Ultimately, there’s not much the Fed can do to bring the dollar down. Short-term interest rates are at zero already, while the U.S. economy is a comparative bright spot amid otherwise dismal growth in developed markets. U.S. assets (priced in dollars) are in demand.

True, the dollar has backed up repeatedly during this long, subpar recovery. That doesn’t mean the latest bout of strength will last, and it doesn’t automatically spell doom.

But it’s one more thing to worry about, because it sure isn’t doing U.S. multinationals and their investors any favors.

As of this writing, Dan Burrows didn’t hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/05/stronger-dollar-spells-bad-news-for-stocks-oil-gold/.

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