Some companies are already warning investors that a strong dollar will pinch performance

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Dollar on track for strong second quarter, but still lower year over year

Corporations have begun warning investors that the U.S. dollar's rally could hurt their performance. And while two months of strength for the greenback might not mean all is lost for the next round of earnings, it's time to start paying attention, analysts said.

"The dollar hurts multinationals in two ways: it makes their products more expensive and it hurts their overseas earnings," said Alec Young, managing director of global markets research at FTSE Russell. "Tech and energy are more global sectors, while utilities and financials are more local" and thus more shielded from the buck's advance.

The dollar is on track for an impressive second quarter, more than reversing the losses it registered in the first three months of the year. The ICE U.S. Dollar Index, which measures it against six major rivals, is up 2.6% in the year so far, according to FactSet. For the month of June alone it's up 0.5%.

The move was driven in part by disappointing European economic data, which weighed on the euro , but also interest rate differentials as the Federal Reserve remains at the forefront of tightening monetary policy among major central banks.

On top of that, growing tensions between the U.S. and its major trading partners have led to selloffs for emerging market currencies, as well as for developed markets like Canada, adding to the greenback's strength even though analysts agree that trade wars aren't fundamentally positive for the dollar.

But "even though the dollar is up now, you have to compared it to its level a year ago," for a meaningful comparison, Young argued. After all, company earnings were also reported year-over-year. Compared with 12 months ago, the dollar is indeed still down 3%, FactSet data shows.

"I don't expect a huge effect now," said J.J. Kinahan, chief strategist at TD Ameritrade, of the next round of earnings. "But if the 10-year Treasury note moves back toward or above 3%, then the effect might get bigger." The yield on U.S. government debt represents forward interest rate expectations, which also drive the dollar higher.

"Now, if we're talking about sequential comparisons, the dollar's recent rally is relevant," Young said. If the dollar continues to appreciate over the next few quarters it may start to bite. But it will have to move a bit more before it really hurts stocks.

About a third of revenues in the large-cap Russell 1000 index (.RUI) are generated abroad versus only about 20% in the small-cap Russell 2000 index (.RUT), Young said. For major indexes like the Dow Jones Industrial Average (.DJI) or the S&P 500 (.SPX), foreign revenues contribute almost 50% and 40%, respectively, according to the index ETF data on FactSet.

"Apple (AAPL) talked about the weak buck being a benefit in the first quarter and Facebook (FB) has talked about dollar weakness helping them in the past," said Kinahan. "So I'm watching those two. They are also widely held by retail investors."

Apple already made currency-related headlines earlier this year when the consumer tech giant announced it would repatriate foreign earnings. President Donald Trump's tax plan incentivizes companies to bring cash back from abroad and only pay a one-off levy. Apple  paid $38 million for the one-off fee, leading investors to think it repatriated around $250 million.

Beverage giant Coca-Cola Co. (KO) said last week it expected foreign exchange rates to hurt its comparable revenue rather than help it, predicting a currency headwind of 0% to 1% in both the second quarter of the year and the full year earnings. Previously, Coke had forecast a 1% tailwind thanks to a weak buck.

Also last week, cruise operator Royal Caribbean Cruises Ltd. (RCL) said on a conference call that "the strong dollar and higher fuel prices have impacted us by approximately $0.25," in relation to their adjusted earnings per share, which they expect to be in the range of $8.70-$8.90 in the full year 2018.

Cruise operator Carnival Corp. (CCL) joined their ranks on Monday, cutting its full-year outlook and citing higher fuel prices and the stronger dollar as unfavorable.

"Any of the international airlines would also be impacted by higher crude oil prices and a stronger dollar. And international travel would be affected," Kinahan said.

At the same time, multinational businesses that generate profits in a given local currency but also have local operations have an inherent hedge against currency swings, because profits and expenses are in the same currency. Beyond that, there was still the swaps market that companies can take advantage of to smooth over exchange rates swings, Kinahan said.

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