You will never get the Federal Reserve, U.S. Treasury and President Obama to admit that the biggest problem for the U.S. economy right now is the strong dollar.
Politicians always say they favor a strong dollar, but in reality, it causes more pain than gain for the U.S. economy especially in this type of market environment.
We are in the middle of earnings season and investors are bracing for the worst results since 2009.
Big names such as Kimberly-Clark or McDonalds are typically hit hard by currency fluctuations. According to FiREapps, a currency risk consulting firm, 353 of the 850 North American companies were surveyed, and result? Currency swings negatively impacted their earnings in Q3…more than double the previous quarter!
According to the head of FiREapps, this is “the largest number of companies talking about currency impact that we’ve ever seen.”
So yes, the U.S. dollar is causing big problems for U.S. corporations.
At first glance, these figures may not seem that large, but of the 61 North American companies who specifically quantified the effects of currency swings, they reported an average of 12 cent hit per share, compared to 3 cents in the same quarter in 2014.
This means currency movements not only affected underlying earnings, but also the share the price.
Considering that the Dollar Index rose to an 8 month high in early December, earnings in the fourth quarter will be even uglier than Q3.
The strong dollar can be blamed for everything from lower stock prices, falling commodity prices, to slower manufacturing and service sector activity. Yes it’s true, 2016 started off with markets around the world melting down because of China’s problems; but disappointing U.S. earnings added to the collapse.
The price of oil has also fallen too far… too fast… causing energy companies to report their first earnings decline in nearly five decades.
Cheap oil is supposed to encourage consumers to spend more; but with the stock market collapsing and wages stagnating, Americans aren’t eager to part with their hard-earned cash.
Meanwhile, more jobs are expected to be lost in the energy industry, which poses a threat to economic activity.
So while a strong currency makes foreign products less expensive and makes traveling abroad more attractive, the pain that it causes for the markets makes it difficult many Americans to even think about sipping wines in the vineyards of Tuscany.
Let’s also not forget the pain that a strong dollar causes for other countries. In the past 3 months, the Canadian dollar lost more than 10% of its value against the U.S. dollar, the British pound is down 8% with the Australian and New Zealand dollars down more than 5%.
In other words, everyone is feeling the sting of a stronger dollar.
These numbers don’t even compare to the 29% depreciation in the Argentine Peso or the 20% decline in the Russian Ruble and South African Rand.
Many countries prefer a weak currency, but the rapid and steep declines that we have seen in the past few months have some nations worrying about their ability to stay competitive.
This is a serious enough problem for these countries to consider; lowering interest rates or taking other steps to drive down the value of their currency, may reignite the slippery currency war. But there is good news!
The one saving grace of a strong dollar is that by causing stocks to fall, and by driving down commodity prices, it also deters the Federal Reserve from raising interest rates too aggressively.
If the Fed decides that they are one and done this year, then perhaps the continuation of easy monetary policy can help to turn the U.S. and global economy around.
Until Next Time,
Ms. Kathy Lien is the Managing Director and Founding Partner of BKForex’s strategies. Ms. Kathy Lien is a leading currency expert with more than 15 years of forex market experience. Frequently touted as a trading prodigy, Ms. Lien graduated NYU Stern at 18 and immediately started working on the forex desk at JPMorgan. She started the #1 Forex news site DailyFX.com and is now a regular contributor to CNBC Squawk Box and a former host of CNBC’s forex show, Money in Motion. Ms. Lien is also an internationally-published author of the best-selling book, “Day Trading and Swing Trading the Currency Market” (now in its third edition) and “The Little Book of Currency Trading.” Her extensive experience in developing trading strategies using cross markets analysis earned her worldwide recognition. Ms. Lien has taught forex to thousands of traders and is invited to Asia, Europe multiple times a year to conduct beginner and advanced workshops.