Larry Fink, head of Blackrock, the world’s largest asset manager, is warning that the strengthened US dollar is posing a threat to the US economy. The Financial Times reports that Fink will make the comments in the forward to the company’s annual report next week. Fink writes that the stronger dollar will undermine confidence that CEOs have in the US economy and slow “both investment decisions and future growth in the US.”
What does this mean?
The US dollar has risen 25% in the past nine months versus a basket of other major currencies. This makes it more difficult for US exporters to sell their goods and services abroad, as they are now priced more expensively in the importer’s home currency. As Fink notes, although “the US economy as a whole is not overly exposed to exports, many of our largest and most influential companies are.”
Why should I care?
The US dollar’s strength has been a market headwind for some time now. It is a negative certainly for US exporters, but also for any US company with overseas profits, as those profits are now worth less when converted back to US dollars. Some companies hedge out this currency exposure, but many do not and hence the lower revenues they experience often result in a lower stock price. As Japan and Europe continue with their quantitative easing actions and the US Federal Reserve continues to contemplate raising interest rates, it is difficult to contemplate the US dollar weakening much from current levels, in the short term at least. Much of the effect is already priced in to stocks – which is one major reason why European and Japanese stocks have outperformed US stocks this year – but it is a major driver of returns and therefore warrants continued attention by investors.
Originally posted as part of the Finimize daily email.
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