The U.S. Dollar Index, which measures the performance of U.S. dollar against the major global currencies, has invariably been increasing since last year. It has during the past year increased by almost 25%. Contrary to conventional wisdom, an increasing currency value is not necessarily good for the economy. It can, in fact, affect certain segments of the economy adversely. However, it does benefit certain economic players such as importers and consumer of imported goods but the multinationals, manufacturers and resource producers are negatively impacted by a soaring U.S. dollar.
An increase in the dollar exchange rate causes the goods produced in the USA to become costly in terms of other currencies, thus, impacting exports adversely. On the other hand, it decreases the price of goods imported into the U.S. in terms of U.S. dollars. It can also affect the balance of payments accounts negatively. An increasing U.S. dollar exchange rate is unfavorable for U.S. manufacturers and multinationals because it decreases the global competitiveness of their goods. A decrease in sales revenue lowers the profit earned by U.S. corporations and multinationals. Lower-than-expected profits are bound to impact U.S. companies' stock performance badly.
Countries like India and Japan are availing themselves to the fullest of the increased value of the U.S. dollar. It is causing the competitiveness of goods produced by them to increase, consequently, raising the demand of their products. They are also saving millions of dollars’ worth of foreign exchange reserves by paying less in terms of US dollars for their energy imports.
U.S.-produced goods are having a tough time competing with Asian goods in the global market. In January this year, some of the biggest U.S. companies like Pfizer (PFE, Financial), Microsoft (MSFT, Financial) and P&G (PG, Financial) expressed their concerns over the increasing dollar exchange rate and how it would affect their sales and receivables due from foreign markets. Certain U.S. companies like Apple (AAPL, Financial), which sells a considerable amount of their total production outside the U.S., may find it hard to compete in the global economy. Hedging, too, at times becomes extremely difficult as exchange rate fluctuations are hard to predict reliably because the market is highly volatile and complex.
The U.S. Fed has, lately, signaled an increase in the interest rates within the next 12 months. Increased interest rates will cause the dollar exchange rate to spike further by attracting investors to inject their capital into the U.S. market. Fortunately, the Fed has decided not to increase the interest rates to the planned level at once but to gradually increase it.
The cardinal factor that impacts the investment decision of a serious investor is earnings. The more the expected earnings the more likely the prospective investor will invest. Rising dollar exchange rate causes the potential investor to believe that the profitability and dividend payments by the company will decrease in the future. It encourages skepticism as regards to the future performance of the company and unfavorably impact the stock market performance of corporations.
