Dollar Strength

We're talkin' 'bout the dollar bill
And that old man that's over the hill
--Simply Red

The US dollar has been increasing against most currencies over the past year. On a board index basis, it is up more than 15% year over year.

Why should that be, you might ask, if the Fed has been printing $trillions? Should all that extra supply cause the value of the dollar to tank?

Perceptive thought, grasshopper, but one has to remember that currency cross rates are nothing but one piece of paper ratio-ed to another. And central banks around the world are all trying to print their way out of debt (e.g., here). That coupled with the perception that the US economy is likely the best house in a neighborhood of growing global village of economic weakness finds the USD strongly bid at the moment.

One consequence of a strong currency in a beggar-thy-neighbor world is that exporters have a harder time of it. Foreign customers can buy less export goods and services when the exporters currency is strong. As such, it was only a matter of time until US multinationals began to take on water from reduced exports.

It appears that time was this week. Various multinational operators have reported either weak earning or forward guidance as a function of lower business abroad. Today Microsoft (MSFT) took early a 10% haircut on the back of its weak report. Caterpillar (CAT) was pounded for over 7%. Against this backdrop, the Dow moved lower to the tune of over 1.5%.

Cries about dollar strength are likely to get loud from here--as will howls from policymakers for monetary protectionism to protect their corporate pals.

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