This year the US Dollar (USD) has fallen nearly 7%. Depending on the particular index you reference, dollar devaluation relative to other global currencies like the Euro or Pound Sterling has ranged between 5.5% to 6.58% (see chart below) since the beginning of 2017. While the decline of most financial assets is characterized as a bad thing, don’t believe the news headlines that try to depict a weaker USD as an explicitly negative economic indicator. It’s hardly a problem, and for most US multi-national corporations, it’s actually a boon!
Certain S&P 500 sectors are poised to benefit more favorably than others for as long as the dollar remains relatively weaker. Information technology receives 60% of their revenues from non-US markets. Materials companies receive 50%, Energy earns 43%, and Industrials get 40% from outside the US (Source: FactSet). A depreciating USD was a key forecast in my 2017 outlook (see my article in The World Financial Review, Currency Depreciation Can Save An Economy In Crisis ), and a supporting thesis to higher US stock prices, as earnings get a favorable boost.
All things being equal, foreign business and retail consumption will favor the more affordable product or service. If US companies are consistent, and don’t get greedy and adjust their pricing structures, European, Latin American, and Asian consumers will be glad to “buy American”. The big factor in this currency trend is less about the US economic situation, and more about how the rest of the the world is evolving from an extreme easy monetary policy regime to a more restrictive one.
For years, quantitative easing (central banks buying domestic debt to artificially deflate interest rates) has been a core strategy across the European Central Bank (ECB) and the Bank of Japan, just like at the Federal Reserve. Now that the ECB has started to message their strategy reversal, the euro currency has strengthened in anticipation. Expect to see continued volatility in our USD, as central bankers the world over press the reset button on easy money.