Strong dollar casts shadow over stock market rally
U.S. currency’s unexpected durability poses increasing risks for American multinationals
IRA IOSEBASHVILI A stubbornly strong dollar is looming over a rebound in U.S. stocks, weighing on companies’ profits and stoking worries of slowing U.S. growth.
The dollar is up more than 7.5% since last February, buoyed recently by a seven-session rally that has wiped out this year’s decline in the WSJ Dollar Index. The dollar’s durability has run counter to Wall Street’s expectations: many investors believed the U.S. currency would weaken amid an expected pickup in European growth and a recent cautious shift from the Federal Reserve. Instead, growth has slowed around the world, leaving the U.S. economy stronger than others.
The dollar’s strength is becoming increasingly problematic for U.S. multinationals that need to convert foreign profits into the U.S. currency. Computing giant International Business Machines Corp, consumer products conglomerate Procter & Gamble Co. and pharmaceutical maker Johnson & Johnson have all said that the dollar’s ascent hurt last quarter’s earnings. Bank of America Merrill Lynch estimated that U.S. companies are on track to take their biggest currency-related hit to sales since 2017—gloomy news for investors concerned about whether the quarter’s results are a warning sign for a decadelong bull market.
A strong dollar also comes at an unwelcome time for the U.S. economy, as many are becoming increasingly worried that a global slowdown, trade tensions and the effect of the Federal Reserve’s monetary tightening over the last two years will hurt growth. Globally, a strong dollar tends to pressure prices for commodities, which are denominated in the U.S. currency and become more expensive to foreign buyers when the dollar appreciates.
Some investors believe the dollar could climb further. Central banks from Australia to Canada have recently adopted the Fed’s wary outlook on monetary policy, suggesting that a gap in yields between the U.S. and many other economies will remain for the near-term. Several said higher U.S. yields, together with the economy’s relative strength, have continued to support the case for buying dollar-denominated assets as some fret that a downshift could be on the horizon.
Ben Randol, a senior analyst of G-10 foreign-exchange strategy at Bank of America Merrill Lynch, entered the year expecting the dollar to fall but took a more upbeat view of the U.S. currency in recent weeks, as signs of slowing growth around the world mounted.
“The rest of the world looks quite weak, and we can say that the U.S. economy is still stronger on a relative basis,” Mr. Randol said. “In that environment, the dollar is going to strengthen.”
Recent data from Europe has bolstered that view. The European Union warned earlier this month that the eurozone economy will grow by 1.3% in 2019 instead of the 1.9% forecast in November, pressured by Brexit worries, flagging demand from China and investor concerns over Italy’s ballooning national debt. The euro is down nearly 9% in the past year.
Official data showed Monday that the U.K.’s economy notched its slowest annual growth in six years in 2018 as the country faced an uncertain path for its exit from the European Union.
The economic outlook remains cloudy in other regions, too. China’s 2018 growth was its weakest in nearly three decades. Australia’s central bank warned earlier this month that there is a risk the economy could be weaker than expected, as the country struggles with lower house prices and weak retail sales.
“The biggest consensus trade in 2019…was to short the dollar, and those bets are now being taken to the woodshed,” Ed AlHussainy, senior interest-rate and currency analyst at Columbia Threadneedle, said in a note. He believes the dollar will continue rising against the euro as investors become more concerned over the economic risks posed by Brexit.
While the dollar has largely appreciated against the currencies of developed countries, it has fallen against a broad range of emerging-market currencies, whose yields are often comparatively higher than those in the developed world. Owning the currencies of developing countries may become riskier in coming weeks, however, if concerns over global growth persist and the U.S. and China make little progress on trade negotiations, investors said.
Momtchil Pojarliev, deputy head of currencies at BNP Paribas Asset Management, has also become more bullish on the U.S. currency this month, encouraged by cautious signals from global central banks.
He is now betting that higher yields in the U.S. will lift the dollar against the currencies of Australia, Canada and New Zealand. He believes the dollar will rise by around 5% against a basket of currencies in the first half of the year.
“There’s a new story for the dollar now,” he said.