One of the things that I enjoy most is the opportunity to speak publicly about the topic du jour. These audiences range from online, to corporate and universities. The speaking part is fun, however, my favorite aspect is always at the end where I take questions from the audience. What I like about this part is that it does two things for me. One, it allows me to have more fun as I have no idea what is coming my way. Two, it allows me to get inside of the minds of the people I deal with daily to see exactly what it is that either confuses them or keeps them up at night.
Last week I was leading one of these discussions. We were talking about interest rates and inflation, which frankly can get kind of dry. I finally got to the end and once again this question showed up which is why I thought it would be a good idea to write and speak about it here.
Why is the US Dollar strengthening and what does that mean to me?
The USD (US Dollar) is by far the largest and most currency in the world (source: Investopedia How the US Dollar Became the World’s Reserve Currency, Richard Best, 9/24/2022). We of course use dollars every day. Companies that sell goods overseas use dollar and currencies every day. Exporters and importers watch the USD closely as it can impact their earnings in a positive or negative fashion, depending on whether they are exchanging to or from the USD. I am going to address three areas that are affected by the rise and fall of the USD and why it matters to us.
How This Relates to us at Home
If you are traveling to Europe anytime soon, then CONGRATULATIONS, your trip is getting cheaper and cheaper every day. Right now, in your pocket or bank account you hold money that is denominated in USD. You get on a plane and fly to Germany. You go out to eat and open your wallet to pay and what do you pay with? Oh, that’s right! I am now in another country, and they use their own currency. I better run down to the bank and exchange my USD for Euros.
Under a 1 for 1 scenario, being that 1 USD = 1 EURO, you would simply exchange let’s pretend $100 for 100 Euros. You pay for your dinner and thank you very much. However, like I said above, the exchange rate between the USD and The Euro changes every second! One moment that $100 in USD might be worth 98 euro and the next 102 euro. Every move UP or strength in the USD means weakness in another currency elsewhere.
The USD has risen this year to levels against a basket of foreign currencies higher than we have seen in a generation. The rise has been more than 20% (source NPR.org, Business, The Dollar is Surging. This is who gets helped – and hurt- by it’s new found strength. David Gura, 9/27/2022). So today that USD may buy in theory 120% of the foreign currency. So, with that in mind, you potentially could have just saved a lot of money at dinner simply because that US currency you own, USD, has gotten more valuable and the local international currency has declined, allowing you to buy more of their dollars.
Our traveler now might be able to get much more bang for her buck in USD while overseas. But what about the European traveler coming to the US? They should reschedule as their trip is potentially going up in price and is more expensive today for them than it has been in decades.
Now let’s take the next step...
You are a company that SELLS your goods all over the world. Let’s use Nike just for fun. They sell their shoes everywhere, but they do NOT sell their shoes in USD let’s say in Tokyo do they. No. They want to sell the shoes in Tokyo in yen for the convenience of the buyer. The company then has to turn around and BUY USD, assuming they conduct business in the local currency with the yen, with those yen taking a loss on the conversion rate. So, when Nike is selling loads of shoes in Japan, their profit margins may be lower every time they make a sale than they were just last year.
It’s not just Nike that is taking a hit to margins. Many US companies sell more product overseas than they do in the US. Check out these numbers:
% Of Sales Overseas
Qualcomm 96%
Aflac 70%
Netflix and Meta 59%
Alphabet (Google) 54%
*Source: Prepare for the US Dollar to hit S&P 500, big tech earnings. Tim Mullaney, 7/11/2022, CNBC online.
This brings us back to how it affects us at home. If these companies that trade on the US exchanges are losing money, then it is means that earnings of these companies could be lower than expected and prices of these stocks could fall and adjust accordingly.
On the other side of the coin, companies that are based overseas and sell their products here in the US will get a boost in the exchange rate and a boost in earnings. Think about luxury goods maker Louis Vuitton Meet Hennessy the biggest luxury brand retailer in the world with 38% of revenues coming from the US. (CFRA Market Scope Advisor Research)
So, what drives these changes?
For the last several decades the USD has been the safe haven for money. Some would also argue the same for the Swiss Franc that is for another discussion. We have had the least amount of fluctuation in our currency. Imagine being in Argentina where you wake up and see inflation rising a 75% overnight! You had $10,000 in the bank and now that buys 75% less than what it did a day ago. This does indeed happen in some economies. This is why so many countries hold their government monies in USD or US Treasury bonds. It is historically safer than their own currency. As long as the USD is seen as the stable play around the globe, there will continue to be large buyers of our currency, especially during times of economic stress.
Many of you have and money in savings accounts, CD’s and the like. What kind of rate did you get over the last several years? Not much! That is not true today. As I write, the FED has raised rates again another .75% and we are seeing yields on the 2 Year US Treasury note yielding north of 4.3%. That kind of yield, in an investment that is deemed the safest in the world, yielding over 4% for just two years of holding is VERY ATTRACTIVE for many investors including overseas investors. As rates rise here in the US, and the local international economy worsens, you see more and more money piling into the USD to collect that yield as well as stay safe. The US Fed has raised rates FASTER than their foreign counterparts thus adding fuel to the fire.
What this also tells us is that many people overseas think that their local economy is trending negative. They want their money out of their own currency more than ever as every day, keeping it local, is losing them money against the USD.
In Conclusion
The data suggests that we are headed toward a global recession. The US may have gotten there first. Our Fed has been extremely aggressive in raising rates, which is very reminiscent to Paul Volker’s Fed. Has it been too fast too soon? Too soon to tell. For most investors and consumers though it doesn’t really matter. What does matter is where will this global money flow when recessions hit the international community? It could flow to the US economy. The most dire economies are those that are more challenged than the larger economies, those we refer to as emerging markets. There could be big trouble ahead for these economies.
Quick Aside on Rates
I would be remiss about writing or discussing anything without further mention on interest rates here at home. As mentioned above, interest rates have skyrocketed to levels we have not seen in a long time. Inflation figures are also at thirty-year highs. The Fed has publicly said, they will aggressively fight inflation which means raising rates in an attempt to slow the economy down. At some point the Fed may very well succeed. When that time comes and the dust settles, rates could then be lowered accordingly. As we know, when rates rise bond prices fall and when rates fall bond prices rise. Needless to say, we have been in extremely high-rate conditions (compared to the last decade) and bond prices have felt the pain. Now that investors can get better than 4% on yields (as discussed above) many people have more options to invest their saved money than in a long time. This “competition” for lack of a better word may also have an effect on the market on the market’s decline. If the Fed hikes another .75 basis points, as they have hinted that they will, we very well could see 5% returns on short to midterm treasury bonds. Should that become the case, I would also think that the economy could move into recession, thus putting pressure on the Fed to reduce rates at some point in the future if the recession deepens. Once that happens, given the rates/bond price dynamic, it may play out that buying Treasury bonds may wind up being a solid investment. Only time will tell.
Securities offered through SCF Securities, Inc. - Member FINRA/SIPC - Investment Advisory Services offered through SCF Investment Advisors Inc. 155 E. Shaw Ave. Suite 102, Fresno, CA 93710 • (800) 955-2517 • Fax (559) 456- 6109. SCF Securities, Inc. and Redfish Capital Management are independently owned and operated. www.scfsecurities.com. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. To determine what is appropriate for you, consult a qualified professional. The views and opinions expressed herein do not necessarily represent the views and opinions of SCF Securities, Inc. or any SCF-related entity. Redfish Capital Management does not offer legal or tax advice. This material is not intended to replace the advice of a qualified tax advisor or attorney. Please consult legal or
Thank you for your loyalty and for your valuable time.
Sincerely,
Brad Murrill, CEO Redfish Capital
281-256-3100
*Securities offered through SCF Securities, Inc. - Member FINRA/SIPC Investment Advisory Services offered through SCF Investment Advisors Inc. 155 E. Shaw Ave. Suite 102, Fresno, CA 93710 • (800) 955-2517 • Fax (559) 456- 6109. SCF Securities, Inc. and Redfish Capital Management are independently owned and operated. www.scfsecurities.com