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The resurgent dollar could hurt S&P 500 earnings

Published on NewsOK Modified: March 30, 2013 at 10:41 am •  Published: March 30, 2013
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NEW YORK (AP) — The dollar is rising again.

After a drop last autumn, the U.S. dollar has climbed 5 percent against other currencies over the past two months, reaching the highest level since August.

The main reason is the recovery in the U.S. economy. Although growth is still weak, the outlook for the U.S. is better than elsewhere in the developed world. Europe is stuck in a recession and struggling to control its debt. Japan is trying to push down the value of the yen to boost exports and end deflation.

A strong dollar helps Americans by making imports cheaper and curbing inflation, but it can also hurt U.S. companies. Technology companies have become increasingly reliant on overseas sales, and a stronger dollar reduces the value of their overseas earnings.

The impact of the dollar's appreciation is starting to show up in earnings reports. The insurer Aflac, which does much of its business in Japan, says its earnings were hurt as the yen fell against the U.S. currency. Procter & Gamble, which makes Gillette razors and Crest toothpaste, said the stronger dollar was holding back its sales growth.

Many analysts predict that the dollar will continue to rise. Here's a look at what a stronger dollar means for investors.

TOUGH FOR TECH AND MATERIALS MAKERS

A rising dollar could spell trouble for U.S. companies that make software and gadgets, as well as companies that make basic materials like aluminum.

The tech industry relies heavily on foreign sales for growth. About 56 percent of its revenue comes from outside the U.S., according to research by RBC Capital Markets. As the dollar strengthens, U.S. goods become more expensive overseas, discouraging buyers.

Investors worry that could slow business — and profits. As a result, technology companies are tied with materials makers as the worst industry in the S&P 500 this year, rising just 4.2 percent, compared with 10 percent for the overall market. Business software giant Oracle said its most recent earnings report on March 20 that the rising dollar lowered its earnings by about two percent.

The materials industry, which includes Dow Chemical and miner Cliffs Natural Resources, also gets more than half of its sales overseas.

"We would be wary of sectors that derive a lot of their sales overseas, given that fact that we expect the dollar's strength to remain," says Kristen Scarpa, an investment strategist at Barclays Wealth and Investment Management.

COMMODITY CONCERNS

When the dollar appreciates, it makes commodities like oil and metals — which are priced only in dollars — more expensive for customers who buy them with other currencies like the euro and the yen.

That can weaken demand for commodities, hurting the profits of the companies that produce them, like oil producers Exxon Mobil, Chevron and metals companies like the aluminum producer Alcoa.

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