Strong is good.
Strong earnings. Strong sales. Strong demand. Strong orders. These all paint a picture of economic growth, which is good for the country.
But when it comes to the U.S. dollar in a global market … strong is a problem.
Baupost's investment process involves "never-ending" gleaning of facts to help support investment ideas Seth Klarman writes in his end-of-year letter to investors. In the letter, a copy of which ValueWalk has been able to review, the value investor describes the Baupost Group's process to identify ideas and answer the most critical questions about its potential Read More
The U.S. dollar has been on a tear recently, soaring higher against the other major currencies so that the U.S. Dollar Index is now up 4.3% in 2016. While that doesn’t sound like much when you look at the Dow Jones Industrial Average, which has enjoyed a double-digit gain this year, you have to remember that currencies don’t make huge moves. At least, they normally shouldn’t.
Now the dollar is nearing parity with the euro, which has its own basket of troubles as the union threatens to pull apart at the seams. Currency analysts at Deutsche Bank are actually calling for the euro to trade below parity with the dollar in 2017, falling to $0.95.
But a strong dollar means that U.S. goods sold overseas are now more expensive, making them less competitive with local goods. Companies are either faced with slashing their prices overseas to stay competitive — which results in less revenue — or keeping their prices unchanged and risking fewer sales. Either way, the picture isn’t good.
Multinational corporations such as Procter & Gamble, McDonald’s, Coca-Cola, Caterpillar and many more are going to see their earnings squeezed even further in the coming quarters as their foreign sales take a hefty hit.
And the dollar’s strength is unlikely to wane anytime soon. The Fed’s interest-rate hike just made the dollar more attractive, increasing demand. The Fed has said that it’s looking to raise rates three times in 2017 — not that I’m actually looking for that to happen. Remember that the Fed stated at the start of this year that we’d see four rate hikes.
The latest economic reports showed some nice strength, but if the U.S. dollar continues its climb against the other currencies of the world, we could see our multinational companies flounder … triggering an economic collapse.