When Will US Companies Scream About The Dollar?

One of the things that businesses watch carefully is the value of the US dollar.  One of the shining parts of the American economy over the past ten years has been the growth of multinational corporations.  They are able to allocate resources across the globe to create return.  You can see from the charts below what has happened to the dollar over time.  Currently, it’s on an upswing.  The US economy is doing better than any other economy out there, and the dollar is seeing the benefit relative to other currencies. By the way, one of the reasons the price of oil has dropped is because the value of the US dollar has gained.  World oil trade is conducted in US dollars.

Additionally, Japan is purposely pushing the value of its currency down to create economic growth.  The Eurozone has all kinds of credit troubles it is trying to solve through a cheaper euro.  My friend Yra is a top forex trader.  He blogs here.

Here is a US Dollar vs Euro Chart

Euro to US Dollar Exchange Rate data by YCharts

And a US Dollar Index

^DXY data by YCharts

2015 will be an interesting one for the US dollar. I think it will continue its upward trend and by 2016 will be more valuable than it is today.  That has implications on balance of trade numbers and will make US goods more expensive outside the US.

Conversely, a stronger US dollar is good for consuming/traveling Americans.  You can buy more stuff.  I was in Turkey over Christmas.  The exchange rate of USD/Turkish Lira was almost 1/2.35.  On January 1 of 2013 it was 1/1.78.  That’s a 32% difference.

Will it make a difference on economic growth?

That depends.  Undifferentiated commodity type goods that have alternative substitutes in other countries will benefit from a stronger dollar.  US manufacturer’s could feel the sting.  Do you want jelly from Turkey, or jelly from a US manufacturer?  The Turkish jelly is 32% cheaper since 2013.

This is where innovation plays a gigantic role.  New technology and products that are undifferentiated and unique will still sell.  Startups that manufacture those products still can do well.  I am invested in two companies that manufacture and license products like that, UICO and NuCurrent.  I am very bullish both companies.

Most US corporates have not done a lot of investing in plant building or innovation over the past several years.  They have let cash accumulate on balance sheets.  They have streamlined and trimmed operational expenses.  They have participated heavily in stock buybacks.  I have written about buybacks previously going back to 2010.   They might be vulnerable to the dollar rally.

How long before those US corporates are on the phone to Jack Lew to stop the value of the dollar from rising?  Look for execs on earnings calls to moan about the value of the dollar affecting overseas earnings.  Instead of moaning, they ought to be hedging.  By the way, the all in cost of hedging forex is cheaper at an exchange like $CME than it is to do a private transaction through a big bank.

The second action big corporates will take is finally start to use some of their cash to buy innovation so they can offer a differentiated product.  I’d also look for SaaS type companies to be on the hunt for more market share through purchases.  To get bought, startups will need to hit traditional traction targets.

An unrelated note about Bitcoin

Bitcoin prices have dropped a lot over the last year.  I don’t read a lot into that since the market for Bitcoin is still in early development, and the actual trading market for Bitcoin is highly illiquid.  I am bullish the Bitcoin ecosystem, especially after traveling to multiple countries overseas.  The price of the coin is not really relevant to its true potential at this point.   The cheaper price will drive more adoption, not less.  If your business is in the transaction business, you should start to figure out how to integrate Bitcoin into it.

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