The continued surge in the dollar looks finally to be taking a toll on US equities, especially those of US-based multinationals. Yesterday’s big opening rally fizzled with the S&P unable to hold levels above 1300 in the S&P again. Throughout it all, the dollar maintained its strength and the secular bull market in the dollar could soon crimp earnings of firms that benefited from overseas earnings being boosted by the formerly weak greenback.
Hedging strategies for corporates were easy in recent years: don’t hedge. All that changed this summer, and corporate treasurers have been forced to dust off old strategies (and mostly chase the dollar higher in a full-fledged panic). At some point in the next earnings cycle or two, this new environment will fall to the bottom line and it will not be pretty. On the bright side, the firmer dollar is cooling commodity prices, so imput costs will drop, which could offset the sudden dollar surge.
