London ( Business) — The US dollar is rising at a breakneck pace, reaching its strongest level against other major currencies in nearly two decades.
That’s handy for American tourists traveling abroad this summer. But on Wall Street, it is a cause for growing concern.
“A very strong US dollar provides more headwind for earnings,” Morgan Stanley equity strategist Michael Wilson told clients this week.
The US dollar index has soared 4% in the last month and almost 13% so far this year, while other major currencies have suffered.
The euro has fallen 12% this year. On Tuesday, it hit parity with the US dollar for the first time in 20 years, as fears about the region’s economy, fueled by Russia’s war in Ukraine, push investors to dump their holdings. The pound has retreated towards levels seen during the worst days of the pandemic.
The dollar’s rise began in anticipation of interest rate hikes by the Federal Reserve, which make the United States a more attractive place to deposit cash. But in recent weeks, the dollar has dominated for other reasons.
First, there is its reputation as a safe investment. As anxiety mounts about the health of the global economy and the likelihood of a recession mounts, investors are rushing to pick up dollars as a store of value.
“In the current atmosphere of risk aversion in the markets, the US dollar rally is likely to continue in the near term,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said in a recent research note.
Other traditional safe haven currencies are not getting the same boost. The Swiss franc is up nearly 8% this year. Japan’s yen has been volatile, recently reaching its weakest level against the dollar since 1998.
That’s in part because the US economy looks stronger than its peers, another major driver of the dollar’s rise.
Europe is grappling with a growing energy crisis that could make it much harder for the European Central Bank to fight inflation. Some officials are concerned that the Nord Stream 1 pipeline, crucial for shipping gas from Russia to Germany, which is shut down for routine maintenance, may not be able to restart normally later this month. That could force governments to carry out emergency interventions.
“A scenario where the euro zone has to ration gas supplies to industry: if that’s not an economic crisis, what is?” Jordan Rochester, currency strategist at Nomura, said on Tuesday. He also predicted that the euro will continue to fall.
Meanwhile, the UK is paralyzed by a political vacuum as the race to replace Boris Johnson as prime minister begins, and Japan appears locked into super-loose monetary policy, opting to prop up the economy rather than cap growth. of prices.
What it all means: A stronger dollar gives Americans more spending power when they’re out of the country. But as Wilson pointed out, that’s not necessarily a good thing for stocks, as it reduces the value of Corporate America’s international sales and earnings.
US firms generate about 30% of their sales abroad, he calculated. And at a time when they’re already dealing with the effects of inflation, additional inventory and changes in demand, that’s an added drag.
“This dollar strength is just another reason to think earnings revisions will be reduced in upcoming earnings seasons,” Wilson said. “So the recent rally in stocks is likely to fade before long.”
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