A ‘pinch’ for the stock market but good news for the Fed: What investors need to know about a stronger US dollar

Microsoft Corp. It’s not the only US company pointing to the dollar’s boom as a potential problem.

a strong dollar has been a hot topic This week since the software giant
msft,
-1.66%

And sales force Inc,
crm,
-1.85%

Pointing out the challenges that the currency is creating for earnings. It has also been flagged in other industries including Pfizer Inc.
pfe,
+0.99%

eBay Inc.,
ebay,
-1.42%

and mastercard
M.A,
-1.45%

Since a strong greenback could hurt overseas sales.

“The strength of the dollar has been a story for a while,” said Dec Mularkey, managing director of investment strategy and asset allocation, SLC Management. DXY Recently climbed to nearly 20-year highs, as measured against a basket of rival currencies.

“It may be a pinch for companies, but clearly it’s good for the Fed,” Mularkey said.

A stronger dollar makes it more expensive for US companies to sell their goods in the international market, which could hurt the stock market. But cheaper imports from a stronger dollar help American consumers, the lifeblood of the economy, especially facing homes. Higher costs for gas, groceries and more,

“The strong dollar is helping to keep inflation at bay,” Mularkey said. “It’s important with energy prices where they are.”

Two Sides of the Dollar’s Strength

Even a Hearty Dollar Could Help the Federal Reserve Get Your “Soft” Landing For the economy as it works to pacify inflation by rapidly increasing interest rates over the next few months.

“The whole purpose of monetary tightening – to reduce liquidity – is also to strengthen a currency,” Ash Alankar, head of global asset allocation at Janus Henderson Investors, said over the phone.

“The most important battle that people have to consider is the Fed fighting inflation,” Alankar said. “At the end of the day, if the Fed can beat inflation, that’s ultimately going to determine whether the market is recovering.”

The ICE US dollar index was up 6.5% year over Friday and 13% higher than a year ago, according to FactSet data. Analysts at BofA Global said in a report on Thursday that the dollar could strengthen further this year if inflation falls at a slower pace than expected.

A ‘remarkable market dynamic’

Analysts at Barclays called the dollar “remarkable market dynamics that have shown some signs of reduction” in a Friday client note, while appreciating inflation as well. As long as the dollar continues to rise, the team expects to shine even brighter on the currency in its corporate earnings report.

Analysts have already found management on about 20% of the companies in the S&P Composite 1500 index (see chart).
SP1500,
-1.59%

We have discussed foreign exchange as a headwind in this year’s earnings call, which has nearly doubled for a few quarters.

Management sees bullish forex as headwind

Barclays Research, Refinitiv

They also found that only 5% of the companies in the index described a strong dollar as a tailwind, a sharp decrease from recent quarters. The S&P 1500 Index covers approximately 90% of the market capitalization of the US equity market.

, ‘What the Fed is doing is to try to slow inflation. But they are not doing so without slowing down the economy and hurting equities.,


–Jack McIntyre, Brandywine Global Investment Management

Investors have sought protection in shelters such as US Treasury loans.
TMUBMUSD10Y,
2.950%

And the dollar this year, as stocks and other risk assets have fallen on fears that the Fed may go too far in its sway over inflation and spark a recession. Another concern is that the high cost of living could go out of control for some time, potentially igniting a long-term carnage in the economy.

“Everything the Fed is doing is trying to slow inflation,” said Jack McIntyre, portfolio manager for global fixed-income strategy at Brandywine Global Investment Management. “But they are not doing so without slowing the economy and hurting equities.”

bad news for credit

What’s more, McIntyre said that uncertainty about the path to lower inflation “doesn’t bode well for debt as an investment vehicle.”

A Terrible 2022 for Investors in Stocks and Bonds, the Total Return for U.S. Investment-Grade Corporate Bonds
LQD,
-0.32%

were negative 12.1% on the year through Friday, and minus 8% for high-yield,
HYG,
-0.74%

JNK,
-0.77%

According to Mizuho Securities.

McIntyre expects the Fed to keep fiscal conditions tight until inflation eases to a range of 3% from April’s 8.3% annual rate.

“It goes back to a tough spot on the Fed,” he said by phone. “To break the back of inflation, you have to tighten policy until that happens.”

US stocks took a brief jump after Memorial Day end the week in redWith the S&P 500 Index
spx,
-1.63%

Dow Jones Industrial Average, booking 1.2% weekly loss
DJIA,
-1.05%

For the week, the Nasdaq Composite Index was down 0.9% and the Nasdaq Composite Index, according to FactSet.

Next week, US economic data will include a consumer credit update on Tuesday, followed by revised wholesale inventory data on Wednesday. The housing and jobless claims figures will be released on Thursday. But the biggest Friday will be the release of the May Consumer Price Index.

Reading, Big bank economists say the Fed will only need to get rates up to 3% to calm inflation

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