President Donald Trump said this week that a strong dollar is hurting the economy. “I want a strong dollar, but I want a dollar that does great for our country, not a dollar that’s so strong that it makes it prohibitive for us to do business with other nations and take their business,” Trump said at the Conservative Political Action Conference.
The impact of a strong dollar on the U.S. economy depends on who you ask. Exporters hate a strong dollar because it makes their goods more expensive to foreign buyers. Consumers love getting more for their money when buying products imported from overseas.
The impact on U.S. corporations is a little more complicated. For instance, SunTrust analyst William Chappell last week cut his 2019 and 2020 earnings estimates for Procter & Gamble (PG) by 2%, citing a stronger dollar. Granted, that’s not the most significant item impacting earnings, especially in the face of a slowing global economy.
But American firms sell a lot overseas and the dollar isn’t weakening as expected. That’s a headwind for stocks that investors should be prepared for later this year.
Conventional wisdom holds that the dollar should weaken because the Federal Reserve has slowed the pace of interest rate increases. Lower returns on U.S. denominated assets are one reason the dollar can fall relative to another currency.
Europe was also supposed to be done its monetary easing. Last year, European Central Bank chief Mario Draghi stopped his bank’s quantitative easing program. That action was supposed to make the euro marginally more attractive. Perhaps the end of quantitative easing could push European government bond yields into positive territory.
But Europe’s economy is slowing down, so it will be harder for Draghi to stick to his more hawkish monetary policy. Germany industrial manufacturing indexes hit new lows in February, indicating its industrial economy is shrinking. Germany is Europe’s largest economy. The ECB meets on Thursday.
For Procter & Gamble, about 56% of sales are generated outside North America. That’s above the average level of about 30% for S&P 500 (.SPX) companies.
Tech companies have the highest foreign exposure. Qualcom (QCOM), for instance, generates more than 95% of its sales outside the U.S., and most of its sales are in Asia. Consumer goods firms like Procter & Gamble and Nike (NKE) typically generate about 60% of their sales outside the U.S. Industrial companies often generate 40% of sales outside the U.S. Banking is a domestic business—little revenue is generated outside a bank’s domestic market.
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