Falling Dollar – A Precarious Proposition for Rally in Other Assets
The powerful rallies that have raised stocks, crude oil, and emerging markets for the previous three months are united in one thing, the falling dollar. Shareholders are concerned that could affect their returns.
The Falling Dollar Compared to Other Securities
The dollar has dropped by 4.5% this year, and it is close to a one-year low against other currencies. However, other securities have risen.
- US crude prices are up 69% from their February slumps.
- Gold had risen by 16.5%, unsurpassed in three decades.
- Emerging-market stocks, bonds, and currencies have experienced double-digit gains in 2016.
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An Uncertain Future for Investments
According to analysts, the investment climate looks positive. They have gauged the connection between a weak dollar and their guide of investor interest in uncertain assets. They discovered it was close to its highest level in 20 years.
However, this association could change for the worse. The dollar is affected by opinions of what the Federal Reserve will do with interest rates. Those opinions could change at any time.
The Federal Reserve Reluctant to Raise Interest Rates
Economists believe that the Federal Reserve will not raise interest rates in the near future. This was based on data which showed job growth rate slowed down in April. This would keep up the view that markets will remain risky.
Despite this, further economic reports could mean that the Federal Reserve shifts closer to raising rates. Revenue seeking investors would find the currency more appealing. The risk rally will last.
When the dollar abates, dollar-denominated commodities tend to escalate in value. This happens in spite of an oversupply in many markets. Many developing markets have been affected by a declining demand from China.
US Multinational Companies
In the short term, a weak dollar can assist shareholders in US multinational companies. These are companies which maintain manufacture of goods and services in a foreign country. However, a dollar plunge that lasts 5 or 10 years can lead to foreign procurement of US companies and their shareholders.
Benefits of Acquisition of American Companies
Shareholders can also benefit from the purchase of strong US companies by foreign corporations. They are always keen to buy up companies at bargain prices. These acquisitions provide more opportunities for investors in the short term.
One example is Anheuser-Busch, an American multinational company. It was considered one of the country’s most respected businesses. It was bought up by InBev in 2008, mainly due to the strength of the euro compared to the greenback.
Positive Results of Businesses in A Global Market
Businesses can also achieve higher profits by increasing their national prices. This will then convert to similar overseas prices. Higher prices translate into higher profits.
If the dollar stays fragile for prolonged periods of time, multinational companies will be forced to keep manufacturing of products within the US. The reason for this would be foreign materials would cost more. As a result, there would be more available jobs which would help the economy in its entirety.
Negative Consequences of a Protracted Dollar Fall
- Consumers’ purchasing ability is curtailed, and they start buying generic brands.
- Trade with nations with strong currencies will be curbed, which will lead to lost jobs and lost tax revenue.
- A dollar slump that lasts for 5-10 years will result in businesses and shareholders being acquired by foreign rivals. This will have adverse effects in the long term.
Technology Sector the Winners
The Federal Reserve was reluctant to raise the interest rates, and this was responsible for the continual fall in the US dollar. The prediction of 4 times has not happened, and it has only been raised twice. The Technology Sector were the winners with upward movement in March 2016.
Stocks rose in
- Apple 13.3%
- Microsoft 8.2%
- Facebook 7.3%
- Intel 10.5%
Overseas cash amounted to $750 billion, and IT firms make up 53% of the total. Microsoft was the front-runner.
Microsoft owns $108.3 billion of global earnings and has $94.4 billion in cash overseas. This is a measure to avoid paying taxes. However, it also reduces financial options.
As a result, Microsoft is forced to borrow money in the US. In April 2015, the company paid $10 billion to subsidize dividends and share returns. The business is affected by currency instabilities.
Shareholders will be affected if the dollar continues to fall. In the short term, stakeholders in multinational companies will reap rewards. However, if the trend continues, these companies and the shareholders will be taken over by foreigners. The only solution appears to be a further rise in interest rates which the Federal Reserve seems reluctant to do.