In the global currency cage match, the dollar is as unstoppable as undefeated UFC champ Ronda Rousey.
The greenback is trading at a 12-year high against the euro and 8-year high versus the Japanese yen.
This strength is, in many respects, a sign that the economy in the United States is much healthier than Europe, Japan and many other parts of the world.
It is great news for Americans looking to travel overseas anytime soon. It’s possible that the euro could reach parity with the dollar in the not-so-distant future. One euro is currently worth about $1.07.
The surging dollar also helps make the price of imported goods cheaper in the U.S. Looking for a Japanese car or handbag from Italy? Now might be a good time to start shopping.
But investors are taking the opposite approach to the strong dollar. They are selling stocks as fast as they can. The market was tanking on Tuesday.
Why are traders so worried about the bounce in the Benjamins? There are two key reasons.
Big American firms that generate a big chunk of sales abroad are likely to get hit when they report their quarterly results. Revenue from their international units will wind up looking weaker when they get translated back into American dollars.
Microsoft, IBM, Procter & Gamble, Johnson & Johnson and Caterpillar are just a few of the many blue chip U.S. firms that have already warned about what a stronger dollar will do to their sales and profits this year.
Still, this is the least of their concerns. The impact of fluctuating foreign exchange rates can be hedged by savvy financial departments. But the moves in currencies are not just a headache for a company’s accounting and financial departments.
It’s hard to hedge against cheaper prices. Remember that the strong dollar also makes the prices of products made by non-American firms look more attractive.
That works in the United States and in foreign markets. Companies like GM and Ford may find it tougher to compete with European carmakers on their home turf if the dollar continues to rally against the euro. Hershey has been hit hard due to the stronger dollar as well as international sales of its candy have fallen.
The stronger dollar is one reason why Katie Nixon, chief investment officer for wealth management at Northern Trust, thinks that earnings for the S&P 500 will increase by only 3% this year.
“The speed of the change in the value of the dollar has surprised many multinationals,” she said. “The impact on the competitive side is harder to hedge.”
How much worse can it get? The dollar has already gained nearly 13% versus the euro this year.
But the dollar could appreciate even further now that the European Central Bank is finally buying bonds through a quantitative easing program while the Federal Reserve seems poised to raise interest rates later this summer.
Focus on companies with little foreign exposure. Simply put, higher rates should lead to a stronger currency.
That’s why George Young, co-manager of the Villere Balanced and Villere Equity mutual funds, said that one way for investors to protect themselves from the strong dollar is to look for smaller companies that don’t depend as much on international markets for growth.
Some of the fund’s top picks are furniture and bedding supplies manufacturer Leggett & Platt and Financial Engines, a company that provides investment advice to workers with 401(k) retirement plans.
“We own mostly domestic companies. So foreign currency changes are not an issue,” he said.
That strategy may do well for a while if the dollar continues to put the euro, yen and other currencies in an armbar like Rousey does to her helpless opponents.
