Since 2008 the U.S. dollar has risen against every important currency in the world.
Its steady ascent has been good for a lot of companies, economies, and investors.
But, if the trend continues, a strong U.S. dollar in 2015 will be bad news for some of those same companies, economies, and investors. Worse, it could trigger a global markets meltdown….
Here Are the Recent Developments
Here's the good, bad, and ugly saga of the dollar's steady appreciation.
Heading into 2008 the dollar was under-valued and slipping against most major currencies. Then, when the Federal Reserve frantically printed dollars to flood banks and capital markets with liquidity during the credit crisis, the dollar strengthened, flying in the face of conventional wisdom.
The spreading crisis panicked global investors, who turned to the U.S. as a safe haven, trading their currencies for dollars to buy U.S. Treasuries. That began the dollar's rise.
With nearly every major economy affected by the Great Recession, any country with anything to sell planned to export its way back to growth.
Of course, the fastest way to make exports more competitive is to make them cheaper to buy. That began a "race to the bottom" where countries were pushing their currencies down by selling them and mostly buying dollars.
Meanwhile, back in the States, the Federal Reserve was flaunting its zero interest rate policy, or ZIRP, making borrowing in U.S. dollars relatively cheap.
Fast forward to today.
The Downside of the Mighty Dollar for U.S. Companies
The dollar is the strongest currency in global trade and the U.S. economy is recovering while most other nations are struggling.
A strong dollar and a growing economy attract capital. That means the dollar is likely to continue to appreciate against other currencies. Plus the Federal Reserve is one of the few central banks talking about raising rates. If or when the Fed raises rates, the dollar will appreciate even more as international investors seeking yield sell other currencies to buy dollars.
Too bad the saying is true: you can get too much of a good thing.
The continually appreciating dollar is starting to weigh heavily on some companies, economies, and investors.
U.S. exports, which have been robust, are starting to become "expensive." Additionally, U.S. companies earning revenues overseas are seeing less actual revenue on their books when they "translate" non-dollar denominated sales into U.S. dollars. This is a practice they must follow according to generally accepted accounting principles, or GAAP.
Big U.S. companies listed in the S&P 500 index get slightly more than 40% of their revenues from global sales, and they're starting to lower future guidance accordingly.
Procter & Gamble Co. (NYSE: PG) recently warned currency translation in 2015 would reduce its profits by at least $1.4 billion. United Technologies Corp. (NYSE: UTX) slashed 2015 sales estimates by $1.5 billion, citing the strong dollar. And drug giant Pfizer Inc. (NYSE: PFE) expects currency impacts will cut $2.8 billion out of 2015 revenue.
When Microsoft Corp. (Nasdaq: MSFT) earnings came out softer than expected and the company warned about currency issues, investors sold MSFT stock down 9%, knocking a whopping $35 billion off the company's market capitalization.
According to Thomson Reuters, analysts' January estimates for 2015 sales gains of 1.3% and profit gains of 4.3% have been knocked down already. They just dropped sales growth estimates 61.5% due to currency impacts, and are now calling for only .5% sales growth. They lowered profit growth estimates almost 22% to 3.3%.
U.S. equity markets could see some profit-taking after reaching an unprecedented series of highs as earnings forecasts get ratcheted down and companies express currency concerns in their forward guidance.
Unfortunately, the prospect of a U.S. stock market correction pales in comparison to what's brewing in emerging markets.
The Most Troubling Factor Abroad from a Strong Dollar
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.