The U.S. dollar is trading at a 12-year high against the euro and 8-year high versus the Japanese yen. In many respects, it is a sign that the American economy is healthier than the European one, as well as many others around the globe. While the euro is currently worth about $1.07, parity is more than possible.
Ordinary Americans, planning travels overseas, are more than happy. Why the same can't be said about investors?
Market players are selling stocks as fast as they
can. The market was tanking on Tuesday.
There are two reasons for concerns:
Big American companies that generate a big chunk of sales abroad are likely to get injured when they report their quarterly results. Revenue from their international units will wind up looking weaker when they get translated back into American dollars.
Microsoft (MSFT, Tech30), IBM (IBM, Tech30), Procter & Gamble (PG), Johnson & Johnson (JNJ) and Caterpillar (CAT) are just a few of the many blue chip U.S. firms that have already warned about what a stronger dollar will do to their sales and profits this year.
The
impact of swinging foreign exchange rates can be hedged by savvy
financial departments. But the moves in currencies are not just a
headache for a company's accounting and financial departments.
The strong dollar also makes the prices of products made by non-American firms look more attractive.
That works in the United States and in foreign markets. Companies like GM (GM) and Ford (F) may find it tougher to compete with European carmakers on their home turf if the dollar continues to rally against the euro. Hershey (HSY) has been hit hard due to the stronger dollar as well as international sales of its candy have fallen.
The dollar has already gained nearly 13% against its euro zone peer, now that the European Central Bank's QE has been launched, as well as Greece is in a deep crisis. Can it get even higher? The Federal Reserve seems poised to raise interest rates later this summer.
Analysts suggest to pay attention to the firms with little foreign exposure. George Young, co-manager of the Villere Balanced and Villere Equity
mutual funds, said that one way for investors to protect themselves from
the strong dollar is to look for smaller companies that don't depend as
much on international markets for growth.
Top firms picked by the fund are furniture and bedding supplies manufacturer Leggett & Platt (LEG) and Financial Engines (FNGN), a company that provides investment advice to workers with 401(k) retirement plans.
"We own mostly domestic companies. So foreign currency changes are not an issue," he said.
