Tuesday, December 15, 2015 12:46:58 PM
US Dollar: Headwind or Tailwind?
The U.S. dollar has been on a tear in recent months, storming higher against a number of other currencies throughout the globe. But the strength in the dollar is a double-edged sword: Although it benefits consumers in some ways, it can hurt large, multinational corporations in C Fund and negatively affect their stock prices as a stronger U.S. dollar means weaker profits for some big, multinational U.S. corporations.
The rising dollar can cut into profits at U.S. corporations selling goods and services abroad in a couple of ways. First, U.S. companies operating abroad are paid in a foreign currency, so when these companies bring home foreign revenues, the conversion back to U.S. dollars means profits are worth less. The second issue is a longer-term concern: A stronger dollar means those goods and services are more expensive for foreign buyers, which could eventually curb demand for U.S. products.
The impact of the strong dollar is felt most by large-cap stocks in C Fund that do a lot of business overseas. "In general, 40 percent of earnings from S&P 500 companies come from international sources, and hence a strong dollar will be a headwind for those multinational companies with significant business overseas," says Omar Aguilar, senior vice president and chief investment officer of equities at Charles Schwab Investment Management.
TSP stock investors looking to reduce the potential influence of the stronger dollar on their portfolios should consider a shift into mid-cap or small-cap stocks when the dollar is falling, i.e., S Fund.
It appears "Dollar bulls" are starting to take a break. Since hitting a new 11-year high in March, the U.S. Dollar index has taken a pause from its massive rise. I've seen some analysts note the U.S. dollar could be vulnerable to a modest pullback in the short term, since expectations for the timing of the first interest rate hike from the Federal Reserve have been pushed to later this month amid signs of slightly weaker-than-expected labor market growth.
The U.S. dollar has been on a tear in recent months, storming higher against a number of other currencies throughout the globe. But the strength in the dollar is a double-edged sword: Although it benefits consumers in some ways, it can hurt large, multinational corporations in C Fund and negatively affect their stock prices as a stronger U.S. dollar means weaker profits for some big, multinational U.S. corporations.
The rising dollar can cut into profits at U.S. corporations selling goods and services abroad in a couple of ways. First, U.S. companies operating abroad are paid in a foreign currency, so when these companies bring home foreign revenues, the conversion back to U.S. dollars means profits are worth less. The second issue is a longer-term concern: A stronger dollar means those goods and services are more expensive for foreign buyers, which could eventually curb demand for U.S. products.
The impact of the strong dollar is felt most by large-cap stocks in C Fund that do a lot of business overseas. "In general, 40 percent of earnings from S&P 500 companies come from international sources, and hence a strong dollar will be a headwind for those multinational companies with significant business overseas," says Omar Aguilar, senior vice president and chief investment officer of equities at Charles Schwab Investment Management.
TSP stock investors looking to reduce the potential influence of the stronger dollar on their portfolios should consider a shift into mid-cap or small-cap stocks when the dollar is falling, i.e., S Fund.
It appears "Dollar bulls" are starting to take a break. Since hitting a new 11-year high in March, the U.S. Dollar index has taken a pause from its massive rise. I've seen some analysts note the U.S. dollar could be vulnerable to a modest pullback in the short term, since expectations for the timing of the first interest rate hike from the Federal Reserve have been pushed to later this month amid signs of slightly weaker-than-expected labor market growth.
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