The U.S. Dollar Has Just Found Its Next Victim
Michael Kramer | Aug 19, 2022 09:38
- The dollar has strengthened materially in 2022
- Recently, China’s economy has gone through a significant slowdown
- This has resulted in the US dollar strengthening against the Chinese yuan
The US dollar index is on the move again and is inching closer to moving to its recent highs. It seems that the dollar has found a new currency to strengthen against, and this time it is against the Chinese yuan.
Much of the dollar's strength in 2022 has come against the euro and yen. The falling value of the euro versus the dollar is due to a weakening European economy and a European Central Bank that has lagged a much more aggressive Federal Reserve. Meanwhile, the Bank of Japan's pledge to keep rates low has allowed the dollar to rally against the yen.
That all changed over the past week, as weaker economic data and the PBOC move to cut its one-year rate by 10 basis points to 2.75%. That helped to strengthen the dollar against the yuan to around 6.80 from 6.74. It is not a big move to this point, but if the Chinese economy remains weak and its central bank moves to cut rates further, it could strengthen the dollar even more against the yuan.
Of course, should the dollar begin to strengthen against the yuan, it could create another FX headwind for many multinational companies that conduct business in China. This would likely negatively impact revenue and earnings for these businesses, potentially adding further stress to companies that have already seen FX hits this year.
Of course, the stronger the dollar gets against all currencies, the bigger the hit for the entire stock market. A strong dollar will negatively impact earnings and sales estimates for the broader indexes. This has already been an issue this year for many companies, but if the trend of dollar strength continues, the more significant the headwind.
The Fed is still likely to be on a path of raising rates for some time while economies in Europe and China struggle. Given that backdrop, it seems likely that the dollar will continue to be a headwind for corporate earnings and stock markets in the foreseeable future, even though it may have stalled out against the euro and yen momentarily.
For now, the dollar needs to be monitored, as it will significantly impact markets.
Disclaimer: Charts used with the permission of Bloomberg Finance LP. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer's views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer's analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer's statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.
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