Medicare Agent News: Another Day, Another Dollar

Tuesday, January 3, 2023

Another Day, Another Dollar

By Nicholas Jasinski | Tuesday, July 19

FX Tailwind. Stocks rallied strongly today, boosted by a weaker U.S. dollar and a possible peak in investor pessimism (more on that below). Those factors put ongoing concerns about a recession, earnings estimates, and the Federal Reserve on the back burner for a day.

The S&P 500 jumped 2.8%, the Dow Jones Industrial Average added 2.4%, and the Nasdaq Composite gained 3.1%.

The U.S. Dollar Index—often referred to on Wall Street as the "Dixie" for its ticker DXY—fell 0.6% today, and is down about 1.5% over the past three trading days. That's a large move for a currency in such a short span.

The index measures the greenback against a basket of other currencies. It is up almost 11% since the start of 2022 and hit a multidecade high last week.

The rise came thanks to U.S. status as a safe haven in rocky economic times, and the fact that the Federal Reserve has been ahead of many other central banks in increasing interest rates this year. And that's meant foreign capital flowing into the U.S. in order to scoop up higher-yielding, dollar-denominated assets, increasing demand for the currency and boosting its relative value.

A stronger Dixie means that multinational companies' foreign earnings are worth less when translated back to U.S. dollars, an issue that's already a hot topic this earnings season.

Yardeni Research president Ed Yardeni estimates that 40% of S&P 500 earnings come from abroad. That means, all else being equal, an 11% rise in the dollar this year has decreased S&P 500 profits by roughly 4.4%.

A stronger dollar makes imports of foreign goods cheaper for U.S. consumers and companies, but conversely makes U.S. exports less competitive abroad.

The net impact on the U.S. economy is tough to nail down. But Yardeni points to a 2016 speech by then Fed Governor and now Vice Chair Lael Brainard. That came after a nearly 20% rise in the U.S. dollar from mid-2014 through early 2017, when Fed policy was similarly out of sync with the rest of the world. In her speech, Brainard said that rise in the dollar "could be having an effect on U.S. economic activity roughly equivalent to a 200-basis-point increase in the federal funds rate.”

If so, then this year's move in the dollar has had the impact of about a percentage point of hikes by the Fed. And the past few days' pullback has had an easing effect, while helping increase the value of companies' foreign earnings. So goes the theory, at least, and the boost to stocks today with the dollar's decline in focus.

Whether or not that trend will be sustained will depend on how quickly the Fed continues to increase interest rates relative to its foreign peers, and how the U.S. economy performs relative to others, affecting demand for imports and exports.

For today at least, it was an excuse to buy stocks. All 11 sectors of the S&P 500 closed in the green and just nine stocks in the index lost value.