A Strong U.S. Dollar is Not Welcome at Home

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The trade-weighted U.S. dollar (DXY) is trading near 1.00, a three-year high, and is pressuring U.S. companies’ overseas profits. Domestic U.S. operations remain strong due to pro-growth economic policies and are somewhat insulated from international problems. That core of domestic economic strength is the reason why the U.S. dollar is a beacon to the world in this time of duress.

Even in good times Europe struggles, as shown by the negative to flat 4Q19 GDP growth in France, Germany and Italy. Japan is far worse; its 4Q19 GDP plummeted 6.3%. Besides the U.S. and China, these are among the largest economies in the world; such lackluster performance has spurred an impetus to flee their currencies for the perceived “safe harbor” of America’s shores.

But a rising U.S. dollar adds insult to injury for U.S. corporations with global operations — it slows demand and exacts currency-exchange losses on repatriated profits. The elephant in the room, though, is China, as it struggles with its own problems. The reflex response of struggling countries is to devalue their currencies — a race to the bottom and a race to the U.S. dollar. The result is this liquidity-driven global rally. I prefer rallies based on improving fundamentals — rising sales and growing corporate earnings.

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