When Americans consider the U.S. dollar, the most common thought likely is “How do I get more of them?” For us, one dollar is one dollar. That is, unless we’re traveling overseas or our investments are. And for shareholders and stock mutual fund owners, talk about the U.S. dollar is worth watching as third quarter earnings season picks up its pace in the week ahead.
The dollar blame game began in the past week with Alcoa. The aluminum maker’s earnings release marks the unofficial beginning of quarterly earnings season. Alcoa’s third quarter financial results were disappointing. The stock had its worst day in five years. A stronger dollar helped lead to a 15 percent drop in profits.
Among more than two-dozen S&P 500 companies reporting earnings already, 15 of them have mentioned that the strong dollar has hurt profits, according to Pavilion Global Markets as reported by Bloomberg.
Investors expect profits shrank in the third quarter. It will mark the sixth straight quarter of year-over-year declines. When the dollar rallies, the value of those sales in foreign currencies is reduced when converted into U.S. dollars.
But here’s the thing — the dollar didn’t rise appreciably in the third quarter. The dollar index measures the American greenback against the currencies of our major trading partners, including the Euro Zone, Canada and Great Britain. The strong dollar has been most pronounced with American businesses in the UK. Thanks to the Brexit vote, the British pound has been, well, pounded.
While about 30 cents of every dollar in revenue for S&P 500 companies comes from outside America, only three cents of every dollar in sales comes specifically from the UK, according to market data firm FactSet.
While the dollar may be a convenient excuse now for disappointing earnings, it retains the power to pinch future profit growth. As the Federal Reserve contemplates raising interest rates, the dollar has already moved higher.
Financial journalist Tom Hudson hosts “The Sunshine Economy” on WLRN-FM in Miami. Follow him on Twitter @Hudsonsview.