Dollar’s Stubborn Strength Dents Earnings Cheer

Dollar's Stubborn Strength Dents Earnings Cheer
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Many market participants believed the dollar would fall on the back of interest rate cuts that both investors and the Federal Reserve had penciled in for 2024.

A strong U.S. currency makes it more expensive for multinational companies to convert foreign profits into dollars, while also hurting the competitiveness of exporters’ products.

Companies guarding against dollar strength must also devote resources to hedging strategies that offset the effects of the rising currency on their bottom lines.

All told, every 10% year over year rise in the dollar shaves some 3% from S&P 500 earnings, according to estimates from BofA Global Research.

“CFOs are asking their treasury teams to be much more diligent in managing the risk that comes from that strong dollar.” The dollar’s gains are being fueled by U.S. economic strength, which is eroding expectations for how deeply the Fed will be able to cut rates this year.

Yields in the U.S. stand above those in many other economies as a result, bolstering the dollar’s appeal over other currencies.

“Corporates were licking their lips, essentially waiting for that to play through.” Not all S&P 500 companies are equally affected by the dollar’s swings.

Dollar's Stubborn Strength Dents Earnings Cheer
Dollar’s Stubborn Strength Dents Earnings Cheer

Dollar’s Stubborn Strength Dents Earnings Cheer Of higher rates to come has as ever is the main factor: the US rates after Trump taking office, with more rate hikes required by the urgency of last week borrowing is going to surge from here and could push.

Of course it is long been known that rate hikes could strengthen the dollar; it is the upward path of US yields that appears to be disarming all but the heaviest your moves, head of FX strategy at Bank of America Merrill Lynch decided to sell the US currency at these levels, while growing demand by Wall Street is a key factor behind the dollar internationalization.

Larger balance of payment and current account flows would be needed before a reversal of dollar strength can be expected, for now.

When the US earnings season gets under way in January, analysts are predicting their richest rewards since 2011, with yearly earnings per share growth for the S&P 500 seen expanding by 23 percent.

In any other context, you might expect the dollar to play its usual role in calming the mood music by softening during the period when American companies support advice that they are reaping bumper rewards.

The reality of an expensive currency can kneecap the earnings this consensus basks on by making exports and overseas earnings far less valuable.

The dollar looks more like Charles Bronson’s Hard to forget this time round.

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