In current news, the dollar has been rising to an 11-month high and is on pace to surge even higher. Investors should be watching the value of the U.S. dollar as it impacts many important investment vehicles that are in portfolios. A rising dollar usually indicates an inverse relationship with the stock market and could especially impact the companies who generate a majority of their revenue abroad.
History of the Dollar Index (USDX)
The U.S. dollar index is an index of the value of the United States dollar relative to a basket of foreign currencies. It is a weighted geometric mean of the dollar's value compared only with a "basket" of 6 other major currencies which are:
- Euro (EUR/USD), 57.6% weight
- Japanese yen (JPY) 13.6% weight
- Pound sterling (GBP), 11.9% weight
- Canadian dollar (CAD), 9.1% weight
- Swedish krona (SEK), 4.2% weight
- Swiss franc (CHF) 3.6% weight
USDX started in March 1973, soon after the dismantling of the Bretton Woods system. At its start, the value of the US Dollar Index was 100.000. It has since traded as high as 164.7200 in February 1985, and as low as 70.698 on March 16, 2008.
Current value of the Dollar
The U.S. dollar index hit its highest level in nearly a year after the Federal Reserve minutes suggested the economy is on pace for steady growth. The dollar index DXY is currently trading at $82.54 after hitting an 11-month high just last week. Analysts suggest the US dollar will continue soaring and will soon be above its 3 year high of $84.14 and head to 90 on the DXY.
Last week, there were numerous economic indicators that positively impacted the dollar. Data last Thursday, which included a drop in weekly jobless claims, were largely positive. The August flash Market manufacturing PMI jumped to its highest since 2010 and the Philadelphia Fed’s manufacturing index was at its highest since 2011.
Existing home sales rose 2.4% in July and the U.S. leading economic index rose 0.9% in July. All of this data along with status quo news from the Federal Reserve FOMC minutes helped continue the dollar’s run on record breaking pace.
How does it impact stocks?
U.S. based companies that have a large percent of sales overseas are greatly impacted by the move in the U.S. dollar because they experience expenses and costs in U.S. dollars. A weak dollar can make costs cheaper than in a strong dollar environment.
If the company is a large exporter, it receives a large percentage of its sales in foreign currencies. Against a weak dollar, the other currency is able to buy more and as a result, the company experiences a boost to revenue and higher profits.
Currently, the dollar is growing stronger and stronger and has the opposite impact. A strong dollar makes U.S. goods more expensive to the overseas markets while costs the company incurs are higher, hurting profits.
Three Companies to Watch
About 40% of the S&P revenue comes from overseas, and many large U.S. companies exposed to foreign markets are significantly impacted by the movement of the U.S. dollar.
Coca-Cola (NYSE:KO), the world’s largest manufacturer and distributor of non-alcoholic beverages, operates in over 200 countries. Coca-Cola generates about $46.2 billion a year through selling more than 400 different brands that produce over 3000 different products.
The catch is that about 75% of revenue comes from international sales or about $34.7 billion. This means that 75% of their revenue is impacted by the rising or falling of the U.S. dollar and currently is feeling the adverse consequences of a rising dollar.
In today’s improving dollar environment, the company’s foreign sales produce lower revenues and needs to find a hedging strategy to limit the consequences. We currently have Coca-Cola as a Zacks Rank #3 (hold) due to a majority of analysts negatively revising their earnings estimate for the current year.
McDonald’s Corporation (NYSE:MCD), the world’s largest fast food restaurant chain, operating in 110 countries generates about $28.30 billion in annual revenue. McDonald’s has 18,710 international stores and just added 212 eateries overseas last year.
The fast food giant has a foreign revenue exposure of about 60% in sales or about $17 billion. This amount of money gets impacted on a massive scale when the dollar even just moves 1/10th of a penny.
If the dollar adversely fluctuates even 1/10th of a penny, McDonald’s has the potential of losing up to $17 million in lost revenue. We currently have McDonalds as a Zacks Rank #4 (sell) due to 98% of current year earnings estimates moving lower as of late.
Pfizer (NYSE:PFE), is one of the leading drug companies with annual sales worldwide of about $50.33 billion with approximately 55% of its sales from foreign markets. However, unlike the previous companies mentioned, PFE's profits are are subject to pricing programs in international markets which cap prices and profitability, unlike in the U.S. free market.
Despite the reduced profit-making potential in foreign markets, they still play an integral role in PFE's ability to meet its financial projections. Approximately $23.7 billion are essentially impacted by the increase or decrease in the dollar’s fluctuation. We currently have Pfizer as a Zacks Rank #3 (hold) due to 50/50 analyst opinion on either upgrading or downgrading their outlook for PFE earnings this year.
Bottom Line
These three companies I have listed above are all goliaths in their respective industries and are solid companies to have in your portfolio. But, in the past year as the dollar index became stronger against the major currencies, companies such as the ones listed above feel adverse consequences in costs for revenue that is generated overseas.
Investors should be keeping one way on the dollar to see if it is going to be on pace to $90 in the key index, which will then cause these massive companies to think about hedging strategies to lessen the burden of a rising dollar.
The Federal Reserve also has a big impact on how investors think of the strength of the dollar, and with quantitative easing winding down and interest rates rising soon next year, the strength of the dollar should increase. Investors should use the U.S. fluctuation of the dollar as another indicator to help them make smart investment decisions in the long run, and consider how a rising dollar may impact other areas of their portfolios as well.