US Dollar

Earnings season is in full swing and so far about 3 out of 4 companies are reporting higher than anticipated earnings, this should reduce downward pressure on stock market prices. The current investing direction will be maintained as financial results are consistent with this segment of a business cycle. While the stock market has had a tremendous rise during the past 7 months, the pace of rise will most likely slow consistent with a return to a more normal investing climate. At the end is a short segment on Nebraska Cornhusker Football trivia.

This newsletter continues on the topic of currency investing in particular the impact of a changing US Dollar. The value of the US Dollar is important for foreign trade and earnings from foreign sales. Unfortunately, the value of the US Dollar has no impact on trading with China as the Chinese government currently has a monetary policy of a constant valuation of the Yuan RMB to the US Dollar of about 6.8 to 1.

Who wins and who loses as the US Dollar rises and falls? As the US Dollar rises and falls the value of US made products sold internationally change and the value of internationally made products sold in the USA change. Companies that manufacture in the USA and sell internationally like a weak dollar because they get higher income. If you travel internationally, you want a strong dollar because your spending power is higher. Just like 2 sides exist on a coin, every plus has a minus when considering currency valuation. It is important to remember that a sale is made in the local currency and then converted.

To better understand this, 2 scenarios will be used, a strong US Dollar, 1 US Dollar equal to 1 Euro, and a weak US Dollar, 2 US Dollar equal to 1 Euro. To illustrate the impact on a domestic manufactuer, if a company sells a widget for $10 the cost in Europe is 10 Euro in scenario 1 and 5 Euro in scenario 2. With scenario 2, if a local company in Europe sells this same widget for 8 Euro then the US company can sell it for less such as 7 Euro, can undercut the domestic producer, gain market share, and get paid $14 making 40% more revenue. Kind of sounds like what has been happened to the USA by the Chinese. US manufactuers like weak dollars and international manufacturers like a strong dollar. You can see how this works in reverse for a strong dollar.

For a tourist traveling to Europe, a strong dollar is good. Upon arrival, you convert your US Dollar to Euros and in scenario 1 you get 100 Euro while in scenario 2 you get 50 Euro. Since the transaction is made in Euros the product costs you essentiall twice as much with scenario 2. For tourist to the US, a weak dollar is good for just the same reason where a person gets more of the local currency during conversion.

The talk about we must have a strong US Dollar is good for some and bad for other. A reason for this statement is because of a model that a strong dollar reduces the cost of an imported product and drives down prices with the idea that it keeps inflation low. From a manufacturing job perspective, making more stuff in our country is a good thing creating jobs so quite franky I like in a weaker US Dollar. My perspective says it is better to pay a little more and employ more people getting a money multiplier in the economy than to lose jobs and pay less money. Then again it is all a matter of your perspective.