A wave of problems from a rising dollar
The U.S. dollar continues to defy gravity, soaring over the world's other major currencies and leading many U.S. businesses to complain that the greenback's strength is hurting their profits overseas.
The euro recently traded at $1.0701 and has fallen more than 20 percent over the past year, as investors braced themselves for the recent start of the European Union's quantitative easing, or QE, program of bond-buying to stimulate the eurozone economy. Earlier Tuesday, the euro hit $1.0697, its lowest point in more than a decade. The last time that the euro was at parity, trading at $1 or lower, was in November 20o2 .
Worries about the rising dollar are weighing on stock prices because it can make the goods produced by U.S. companies less competitive on world markets, which would hurt earnings. On Tuesday, the Dow Jones industrials tumbled 333 points to 17,663, while the S&P 500 fell 35 points t0 2,044 and the Nasdaq dropped 83 points to 4,860.
"On day two of the ECB's (European Central Bank) new QE program, the euro has taken a spill right from the get-go of European trading," Christopher Vecchio, currency analyst at DailyFX, wrote in an email to CBS MoneyWatch. "With German yields at the short end of the curve trading below the interest rate corridor floor of -0.20% -- the level under which the ECB will not purchase debt -- it may be becoming clearer to traders that the ECB will have difficulty achieving its desired results from its QE program, including its rather optimistic growth and inflation forecasts for the next several years."
Indeed, questions abound about what the future may hold for Europe, especially given the continuing uncertainty over the Greek bailout.
But there's little doubt that a stronger dollar will crimp U.S. exports. "U.S. data should soon confirm that American companies may be starting to feel the depressing impact of the stronger dollar, which is up 17 percent since last summer on a trade-weighted basis," wrote Ed Yardeni, president and chief investment strategist for institutional investor advisory Yardeni Research, in a note to clients. "Inflation-adjusted exports are up only 2.9 percent year-over-year through January. Imports are up 5.2 percent year-over-year."
In a speech delivered last year at the London School of Economics, Jason Furman, the chair of the President's Council of Economic Advisors, said a strengthening dollar and a slowing global economy "represents a headwind for the United States." However, since exports represent just 13 percent of U.S. GDP, the impact is muted somewhat. In comparison, U.S. exports are less than half of the 27 percent in the U.K. and 45 percent in Germany.
Still, many U.S. companies are already feeling the rising dollar's negative impact. Procter & Gamble (PG), the world's largest consumer products company, recently warned investors that fluctuations in foreign exchange rates would reduce net earnings by at least $1.4 billion aftertax and trim sales by 5 percent. Walmart (WMT), the largest retailer, estimated its foreign exchange exposure at $2.6 billion in the fourth quarter.
"While US equity investors did not seem fazed by the strengthening USD in 2014, sentiment has been shifting in a marked fashion in 2015," according to a report to clients released today by Bank of America-Merrill Lynch. "Indeed, the S&P 500 has fallen in 19 out of the 27 trading days this year in which the USD rose. The obvious implication is that investors are becoming concerned about the ability of the US economy to cope with the strengthening (dollar)."
Tempus, a provider of foreign exchange services to corporations, expects the euro to strengthen during the summer and climb back to $1.15-$1.20 by year-end. That's still below the historic average of $1.30.
"How far the euro has fallen as surprised many people." said John Doyle, Tempus' director of markets, in an interview. "Overall, we think the U.S. dollar is going to continue to be very strong. Later this year, we may see the dollar retrace some of those gains."
Meantime, the muscular greenback is making itself felt far and wide.