The Stronger Dollar Worries Stock Investors

Posted by: Ben Steverman on May 12, 2010

Since Nov. 25, the euro has lost 16.3% of its value against the U.S. dollar. Since just Apr. 14, the euro has dropped 7.2%.

While talking to strategists and portfolio managers, I’m detecting growing concern among U.S. stock investors about the strong dollar.

The problem is two-fold: First the impact on the U.S. economy and second the effect on reported corporate earnings.

Bruce Bittles, Robert W. Baird’s chief investment strategist told me the strong dollar “will be a headwind for earnings and perhaps the economy as it cuts into exports.”

A weak dollar makes U.S. overseas exports more competitive, while a stronger dollar could hurt exports. For example, if the dollar is weak, sales of Caterpillar (CAT) construction equipment in Germany will net the company more in dollars when those euros are brought back home.

During the greenback’s consistent downtrend from 2002 to 2008, the weakening dollar again and again boosted year-over-year comparisons of overseas cash flow and earnings for companies like Caterpillar. The dollar bounced around wildly in late 2008 and 2009, but now many worry the dollar has strengthened for good, as much of the developed world lags the U.S. in its economic recovery.

U.S. large-cap companies get a big share of their revenue from overseas. Not all companies actually disclose how much of their sales come from abroad, but Morgan Stanley estimated in March that the S&P 500 receives 31% of its revenue from outside the U.S.

Smaller U.S. companies are less exposed to foreign markets. Maybe that’s one reason why the small-cap Russell 2000 is up 3.2% since the beginning of April, while the large-cap S&P 500 is down 1.1%.

Reader Comments

Abhishek

May 12, 2010 1:10 PM

Not only the big exporting companies,any global company with a large footprint in Europe stands to lose. For example the Solar companies outside Europe which are mainly dependent on Europe for majority of their demand.Read more at http://greenworldinvestor.com

Arv

May 12, 2010 4:21 PM

Similar to China, why cannot the US devalue the dollar so goods are more competitive. Sure there is a balancing game that needs to be played since the dollar is used for oil and other hot commodities but if the US needs to have an edge in the losing export battle, maybe its time to utilize the trick of our competitors.

Al Sefati

May 12, 2010 7:16 PM

Many argue that stronger dollar means more global authority and better long term economy.

edy

May 13, 2010 11:08 AM

Yes, please devalue the dollar so that I can pay out of my a** at the pump

Setti

May 14, 2010 12:20 AM

Strong Dollar will not make US less competitive, weak dollar make everything more expesive in US, what is the trade off? Look at Yen stand at Y100 per dollor yet Japanese export didn't drop and German were okay when 1 Euro = $1.6.

Anthony

May 14, 2010 6:50 PM

This reminds me of the mid 1990's with strong dollar and weak exports and much higher interest rates. The Internet Boom bailed us out for awhile during this period. What's going to bail us out now?

Sarah Jones

May 25, 2010 1:14 AM

Good Comments!!!!!!!!!!!!!!!
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Sarah

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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