US Dollar Strength: Causes and Opportunities

US Dollar Strength: Causes and Opportunities

Daniel Lacalle 04/07/2018 7

Catching a falling knife is never a good idea. A strong dollar (USD), moderation of GDP and earnings growth estimates are happening at the same time as global economies continue to increase fiscal and trade imbalances.

The collapse of emerging market currencies from a modest reduction in Fed balance sheet and small rate rise shows the extent of the imbalances built by many economies in the QE years. As USD strengthens and capital flows turn to the US, emerging market debt refinancing becomes more challenging.

US dollar strength and gold divergence is interesting. It seems that the market is pricing a disinflationary outcome of the global slowdown - as gold is usually an inflation hedge - and a flight to safety.

A strong dollar is a positive sign for America because:

  • High added-value doesn’t need devaluation. US exports 12% of GDP. 
  • Higher purchasing power for savers and salaries enable better consumption.
  • It attracts capital, making Treasuries and US investments more attractive and safer for global investors.

US growth improved in June, particularly strong vs weakening China, Eurozone and Emerging markets.

June ISM Manufacturing Index rose to 60.2 vs China and Eurozone.

PMIs show the evidence of global slowdown. Manufacturing PMI in June 2018:

  • China 51.0 vs 51.5 in January
  • Eurozone 54.9 vs 59.6 in January
  • Japan 53.0 vs 54.8 in January.

USD strength has a lesser impact on profits:

  • Technology, high-margin, high added-value firms are more than 27% of S&P 500.
  • US exports are less than 30% of S&P revenues. Corporate profits correlation with the USD is not very strong at all. US profits mostly suffer when oil rises.
  • Stronger dollar means more inflows into US assets and Treasuries with a rate hike path confirmed.

A version of this article first appeared here.

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  • Jack Evans

    The dollar is so strong in 2018 because the Fed ended its expansive monetary policy as the economy improved.

  • Craig Ozzie

    Political instability in the European Union especially Italy helped the dollar. Traders and investors short the euro to profit from its potential devaluation.

  • James Connell

    The dollar's rally is turning into a problem for some big organisations. A weaker dollar lifts the profits of multinational firms because it makes their products less expensive in foreign markets. Some organisations get to report higher revenue from abroad when they translate their international sales back into dollars.

  • Paul Acton

    I expect the FED to raise interest rates three more times in 2019.

  • Barry Vander

    Interesting article, I have also had a look at your video. It seems like the dollar is enjoying a resurgence as of late.

  • Emma Scott

    Trump deserves some credit for strengthening the dollar. Happy 4th July everybody.

  • Chris Bennett

    Good explanation, this makes a lot of sense.

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Daniel Lacalle

Global Economy Guru

Daniel Lacalle is one the most influential economists in the world. He is Chief Economist at Tressis SV, Fund Manager at Adriza International Opportunities, Member of the advisory board of the Rafael del Pino foundation, Commissioner of the Community of Madrid in London, President of Instituto Mises Hispano and Professor at IE Business School, London School of Economics, IEB and UNED. Mr. Lacalle has presented and given keynote speeches at the most prestigious forums globally including the Federal Reserve in Houston, the Heritage Foundation in Washington, London School of EconomicsFunds Society Forum in Miami, World Economic ForumForecast Summit in Peru, Mining Show in Dubai, Our Crowd in Jerusalem, Nordea Investor Summit in Oslo, and many others. Mr Lacalle has more than 24 years of experience in the energy and finance sectors, including experience in North Africa, Latin America and the Middle East. He is currently a fund manager overseeing equities, bonds and commodities. He was voted Top 3 Generalist and Number 1 Pan-European Buyside Individual in Oil & Gas in Thomson Reuters’ Extel Survey in 2011, the leading survey among companies and financial institutions. He is also author of the best-selling books: “Life In The Financial Markets” (Wiley, 2014), translated to Portuguese and Spanish ; The Energy World Is Flat” (Wiley, 2014, with Diego Parrilla), translated to Portuguese and Chinese ; “Escape from the Central Bank Trap” (2017, BEP), translated to Spanish. Mr Lacalle also contributes at CNBCWorld Economic ForumEpoch TimesMises InstituteHedgeyeZero HedgeFocus Economics, Seeking Alpha, El EspañolThe Commentator, and The Wall Street Journal. He holds a PhD in Economics, CIIA financial analyst title, with a post graduate degree in IESE and a master’s degree in economic investigation (UCV).

   

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