The U.S. dollar is down about 9 percent this year, near its lowest level since 2015, thanks to a growing global economy. A weaker dollar should benefit U.S. companies, especially exporters, by making their products more affordable overseas. But if the dollar keeps weakening, that benefit could become a detriment, traders say.
If the dollar’s weakness persists, investors may start to wonder if that isn’t a symptom of a larger problem, such as a slowing U.S. economy and stock valuations that can’t be justified. Persistent weakness in the dollar could even hamper the strength in the global economy.
For now, most market watchers think the weaker dollar cushions U.S. exporters and aren’t too worried about the slump. Still, they say, it’s something investors should monitor.
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This correction is natural. Viraj Patel, director of asset allocation at Fiduciary Trust Co. International in New York, says the dollar’s drop from the beginning of the year looks dramatic, but when viewed over a longer period, it’s not so massive.
Between 2014 and this year, the U.S. economy grew faster than those of other developed countries. During that time, the European Central Bank and Japan had negative interest rates, while U.S. interest rates rose, lifting the dollar. That strength continued until the beginning of 2017, when the global economy improved and the dollar’s retreat began. “It’s essentially just unwinding the gains it had,” Patel says. Tim Courtney, chief investment officer of Exencial Wealth Advisors in Oklahoma City, adds that during that time the dollar gained as much as 20 percent, a historically large move.
From a trade-weighted dollar perspective, which pits the greenback against a basket of currencies, the dollar is mostly softer against the euro, Patel says. Eurozone growth “is recovering very nicely” this year and is likely supporting the euro, he adds.
Japan and emerging markets are also doing better this year, says Doug Foreman, chief investment officer and a portfolio manager at Los Angeles-based Kayne Anderson Rudnick Investment Management. Even though the dollar is weaker now, it could soften further. “The dollar could get maybe 20 percent weaker, and it would really just be back to where it was a couple of years ago when the rest of the world wasn’t growing and we were,” Foreman says.
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The weaker dollar is helping global growth, says Kristina Hooper, global market strategist for Invesco. Hooper points to data from the Organization for Economic Cooperation and Development that show both emerging and developed markets are growing. In September, the OECD projected global gross domestic product growth rising to approximately 3.5 percent in 2017 and 3.7 percent in 2018, she says.
The combination of global growth and a weaker dollar supports U.S companies with international business exposure. Citing data from FactSet Research Systems, Hooper says companies with international sales constituting more than 50 percent of their business should see earnings grow 7.9 percent in the third quarter. U.S. companies that primarily do business domestically could see earnings decline 0.1 percent, she adds.
Protectionism worries some investors. Patel, Foreman and Courtney don’t expect the dollar’s decline to accelerate because they believe the dollar is just returning to norm. An alternative market view, however, is that greater dollar weakness is coming, perhaps because of fiscal policy, Courtney says.
Some investors worry that the Trump administration’s protectionist policies, like withdrawing from the Trans-Pacific Partnership and possibly renegotiating the North American Free Trade Agreement, may stunt trade. Hooper says the growth of regionalism, like that seen in the Catalonian elections in Spain earlier this month, could lead to more economic nationalism, like the kind that helped propel President Donald Trump into office. If so, that could encourage more protectionism. That’s the biggest threat to derailing global economic growth, she adds.
Protectionism could hurt demand for U.S. goods and the dollar, which may be behind some of the concerns about the currency’s weakness, Courtney suggests. But Patel says the dollar would have to weaken much more before investors start thinking about the potential effects that might have on corporate profits and global monetary policy, both of which would affect stocks.
The Federal Reserve could tip the scales. The consensus is that the Federal Reserve will raise interest rates again when it meets in December to decide monetary policy. Courtney says when interest rates move higher, a greater demand for dollars usually follows.
With interest rates low around the world, slightly higher U.S. rates could lure foreign investors, he says. The Fed will keep an eye on inflation and won’t want to let it get out of hand, he says. Although core consumer prices for September rose to their biggest increase in eight months, the culprit may have been higher gasoline demand after hurricanes disrupted production at Gulf Coast oil refineries, because inflation overall remained muted.
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Courtney says if the Fed raises rates it will support the dollar, but in the short run, he thinks the greenback could still weaken as it reverts to its historical norm. “The dollar needs to kick off that fear premium it picked up in 2015,” he says. “It probably has a little more downward pressure on it.”
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Will the Falling Dollar Hurt Stocks? originally appeared on usnews.com
