The recent powerful rally in the greenback has been welcome news for investors. Oil has been dropping and the recent horror show of inflationary data could be on the decline. However, nothing is absolute or inherently good. What we mean is that a strongly rallying dollar also has a few downsides. Our big multinational companies have been loving the weak dollar as it has meant booming overseas sales and profits. This has saved the stock prices of many companies.
For example, IBM has forecasted 15% annual earnings growth until 2010, which is a lofty goal for such a big company. This is part of a campaign to re-label the stock as a “growth” play. Despite all of the great things the company is doing including buying back stock and taking advantage emerging markets growth, we don’t see this target being reached if the dollar enjoys a sustained rally that wipes out a lot of the losses over the past few years. The same goes for other big companies such as McDonalds.
Similarly, our exports have boomed over the past few years, which has almost single-handedly saved our economy from recession. A stronger dollar will make our exports less competitive with other countries, and hurt our manufacturing sector.
The point is that there are two sides to every story, and certain parties get helped and other get hurt when there is a sustained move in one direction with the dollar. But, it is definitely a good thing overall for now that the dollar is rallying because it went down way too far, which has stoked inflationary fires and a boom in commodities. So enjoy it, but also remember the other side.
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