US dollar strength ‘will take some time’ to catch up: strategist

The full ramifications of the US dollar strength that has wreaked havoc on the results of big names like Nike (NKE) and FedEx (FDX) in the third quarter probably won’t be felt for a while, warns a veteran currency strategist. .

“What you see immediately today is going to take some time to turn a profit,” said Joseph Lewis, head of FX and corporate hedging solutions at Jefferies, on Yahoo Finance Live (video above). “I think the expectation is that if the dollar continues to be strong, which is what is generally expected, it will see this show probably in the first and second quarters of next year, as the movement recently has been so fast that companies don’t they have done”. I had the time to fully flow through the income statement.”

The US dollar has been on a bullish march for months, fueled by the Fed’s aggressive interest rate hikes to curb inflation and currency instability in countries like the UK. So far this year, the US dollar index has soared 1%, with most of the advance beginning in mid-June after the Fed stepped up its inflation-fighting rhetoric.

The strength of the dollar has the effect of reducing the sales and profits of large multinational corporations doing business in multiple countries. The opposite happens when the dollar is weak.

Such strength is becoming a major pain point for companies (and markets) when it comes to actual financial performance, as well as communicating guidance to investors.

Foodmakers Conagra Brands (CAG) and McCormick (MKC) warned last week of a possible financial hit through the strong dollar. And analysts expect to hear bearish currency talk elsewhere as earnings season gets underway.

A man wearing a protective mask walks in front of a currency exchange office advertisement showing an image of the US dollar amid the coronavirus disease (COVID-19) pandemic in Cairo, Egypt, on May 5. 2021. REUTERS/Amr Abdallah Dalsh

“Unfavorable exchange rates have been cited by the third highest number of S&P 500 companies in terms of a negative impact of 10 (or 50%),” FactSet researchers note in a new note. “However, this number is well above the four-quarter average for this factor up to this very point in earnings season.”

“Given the strengthening of the US dollar in recent months (as indicated by the rise in the US dollar index) and the 40% international earnings exposure of the S&P 500 overall, it is not surprising to see an increase in the number of ( early reports) companies citing a negative impact on earnings, revenue or profit margins due to unfavorable exchange rates,” the researchers added. “The market is likely to continue to watch for more FX comments during earnings season.”

brian sozzi is a general editor and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and in LinkedIn.

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