Dollar rally signals bad news for oil, multinationals

Kenya: The asset with the greatest prowess of late has been the US dollar, and if its rally continues, it threatens to eat into the earnings of multinationals.

The greenback’s recent gains have lifted the dollar index — a measure of the dollar’s value relative to six currencies — for 10 consecutive weeks.

This marks the dollar’s longest rally since the index was created in 1973 — and could pose significant headwinds to dollar-sensitive sectors of the international market, particularly companies that respond to commodity prices affected by the greenback, and multinationals that do much of their business across several borders.

“For the past few years, the US dollar has been trading in a relatively quiet trading range. But now, something changed. We are seeing a new uptrend develop,” said Adam Sarhan, founder and CEO of Sarhan Capital in New York.

Price decline

Analysts have already pointed fingers at the dollar for the decline in prices of commodities like precious metals, corn and oil in recent weeks.

“If you’re a consumer products company that does a lot of business overseas, it’s not going to help you. If you’re a large tech company and you do a lot of business overseas, that’s not going to help you,” said Larry Glazer, managing partner at Mayflower Advisors in Boston.

“If you look at Exxon, as well, they’re clearly very diversified but affected by the consequences of currencies.”

Shares of Exxon Mobil have lost 5 per cent over the last 10 weeks even as the broader market hit repeated new highs. About 36 per cent of Exxon’s revenue comes from the United States, the rest from overseas.

Yet dollar-driven losses in some parts of the market may be offset by gains in others, especially retail. Lower oil prices favour the consumer, who can pocket the savings or spend the cash in shops.

“The stronger dollar benefits consumers because they are the lion’s share of the economy, and any time you get a tailwind for consumers, it’s good for the economy, at least in the short run,” Mr Glazer said.

Much of the calculus of whether the dollar’s rise will become a negative for stocks depends on inflation rates, as well as the speed and scale of the currency’s gains, market watchers said.

“The Eurozone is fragile ... the British pound is also weak, and geopolitical or economic woes remain a threat. As long as it is a healthy and normal advance, they should be able to adjust and prepare for it,” Mr Sarhan said.

“But if the move is very large, fast or erratic, those consequences (could) be immeasurable.”