Why A Weak Dollar Can Help The Stock Market
Published September 25th, 2007 in Trading Tags: coca cola, euro, globalization, HD, home depot, KO, mmm, US dollar, weak dollar, yen.The usual assumption is that with a weak dollar, the US stock market is doomed. That no one will want to invest in US equity because they will be “swimming upstream” — that is, they will have to not only make a profit in US dollars but above and beyond the depreciation of the dollar so that in their home currency they come out ahead.
But there is a paradoxical way that a weak dollar helps the stock market: through overseas earnings. With the increase in globalization, each year a higher percentage of earnings comes from international operations of US companies.
Dow Industrial stocks like 3M (MMM) or Coca-Cola (KP) are classic examples. As these companies earn revenue in Euros, Yen and other stronger currencies, their US dollar earnings will balloon. Of course, there are always exceptions. Companies like AT&T (T) or Home Depot (HD) operate only in the US.
Also, periods of US dollar weakness do not correlate with negative stock market performance. For an example we don’t have to look very far. Since 2002, even though the US dollar has relentlessly fallen, we’ve witnessed a strong and equally unrelenting bull market in equities.
I’m not an automatic dollar bear (as I’ve mentioned before, the dollar may surprise everyone as it has before) but even if the dollar does continue to decline, I don’t think that will necessarily mean that investing in US equities is a losing proposition.
coca cola, euro, globalization, HD, home depot, KO, mmm, US dollar, weak dollar, yen
Enjoyed this? Don't miss the next one, grab the feed or
6 Responses to “Why A Weak Dollar Can Help The Stock Market”
- 1 Pingback on Oct 1st, 2007 at 8:21 am
- 2 Pingback on Oct 5th, 2007 at 6:03 pm
- 3 Pingback on Nov 29th, 2007 at 8:27 pm
Leave a Reply
Search
Creative Commons License
Trader’s Narrative is powered by
Hi everyone,
Your blog is quite nice and informative.
We hope our information will be quite useful for your users also.
As we can see Dollar is becoming weaker day by day as compared to Indian Rupees, which is affecting IT Sector Still IT sector got lot of potential as is due to zoom up once again.
Moreover Recently we have witnessed that Indian stock market has touched new heights surprisingly IT sector was not part of it.
Now NIFTY is already in overbought zone. We can expect NIFTY and SENSEX to fall bit that is correction is due.
Best strategy now- For investors wait for minor correction and buy IT stocks at dips.
For traders – You can mint money in bearish and bullish market both .
Regards
I have to agree that a weak dollar, though it may be concerning, does not always mean bad things for the U.S. stock market. At my blog, I recently looked at the Top 5 companies who would benefit from the current weak dollar.
http://www.growyourfunds.com/2007/09/top_5_stocks_that_benefit_from.html
Except overseas earnings for a few companies, what will be the gain for the usual American? Zero. No gain.
And nobody will want to invest in the mighty dollar.
Conclusion: bad times ahead. Slowly, but surely. A colossus doesn’t sink so fast.