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Strong dollar to inflict minimal pain

Friday, September 26, 2014 - 02:07

The U.S. dollar is at a four-year high. A strong buck may crimp some corporate profits near term but companies should remain mostly unscathed. Jeanne Yurman reports.

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The ol' greenback is getting stronger lately and it has more and more investors worrying that U.S. corporate earnings will get hit. Friday the dollar posted an 11th straight weekly gain against other major currencies after the Commerce Department said GDP grew at 4.6 percent in the second quarter. The dollar's lift is due to the belief that the U.S. economy is in recovery mode and that the Federal Reserve will hike interest rates sometime in the first half of next year. Those higher interest rates mean attractive returns for foreign investors. But that strong dollar can also squeeze profits for firms with a fair share of their revenues coming from overseas. That's because before companies can book foreign revenue as profits they must first convert sales made in the weaker foreign currency to the stronger U.S. dollar. The stronger the dollar gets, the more foreign currency it takes to make that conversion and the bigger the toll it takes on their bottom line. Indeed some companies are feeling the pinch from the stronger dollar says Reuters' Greg Harrison who tracks earnings for the S&P 500 companies. SOUNDBITE: GREG HARRISON, SENIOR RESEARCH ANALYST, REUTERS (English) SAYING: "The stronger dollar has had a greater effect this year as companies have given negative guidance. They've been citing it more and we've seen more negative guidance than usual this year and that's been a frequently cited factor." However, for stocks it's all about meeting or beating Wall Street forecasts. And most analysts are factoring in a currency hit. John Manley of Wells Fargo's Advantage Funds says these companies will likely get a pass. JOHN MANLEY, CHIEF EQUITY STRATEGIST, WELLS FARGO ADVANTAGE FUNDS (English) SAYING: "Unless people look out and say this is going to be here for a long, long time they tend to forgive a few pennies one way or another if the corporation transmits the news clearly." Historically, technology and pharmaceuticals are two areas that often sustain strong dollar damage. While gold, metals and mining also suffer. Airlines, insurance brokers and homebuilding fare better with a strong buck. And more broadly large cap stocks tend to do well as those foreign investor dollars flow into big, well known American names.

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Strong dollar to inflict minimal pain

Friday, September 26, 2014 - 02:07