As the US dollar dipped to three-year lows last week, its intensifying rout has put more focus on American companies that sell goods and services abroad. A weaker dollar makes overseas sales more valuable when converted back into US currency. On the flip side, it can also make imports more expensive and hurt American consumers who would pay more dollars to buy foreign goods and services.
“Some of the strength in the S&P 500 over the past couple of weeks is from the weaker dollar. It’s a tailwind to earnings, and that’s what we’ve been seeing play out here,” said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama. Analysts estimate that between 40 per cent to 50 per cent of S&P 500 sales are from abroad.
On Friday, the dollar index, which measures the greenback against a basket of six major currencies, was on track for its worst weekly decline since June.
Comments from US Treasury Secretary Steven Mnuchin earlier this week that a weaker dollar would help US trade balances in the short term added to recent weakness.
Technology and other sectors with big overseas sales are likely to see the biggest benefit while more domestically-focused sectors like utilities would be less affected. The following is a look at the weaker dollar’s impact by S&P 500 sector:
TECHNOLOGY: Technology has among the highest percentages of overseas revenue, and it includes many multinational brand names that tend to generate heavy demand overseas. Roughly 60 per cent of S&P 500 tech revenue comes from overseas, according data. International Business Machines cited the dollar’s positive effect in its recent earnings call.
INDUSTRIALS: Like technology, industrial companies make products that are used worldwide, so they would be another benefactor of the dollar’s weakness.
The group, which includes companies like Caterpillar, is also getting a boost from the improving global growth picture, that has stoked equity market sentiment. “The thesis of global demand coupled with the weaker dollar certainly makes the US industrial names attractive,” said Quincy Krosby, chief market strategist at Prudential Financial in Newark, New Jersey.
ENERGY & MATERIALS: Sectors tied to commodities valued in US dollars also benefit from dollar weakness because commodity prices rise as the dollar weakens.
Larger US energy firms including Exxon Mobil are among the companies with the biggest overseas sales.
FINANCIALS: A weaker dollar is usually good for financials because it tends to help bank profits if yields go up. Bank stocks have been soaring recently, and the correlation between S&P 500’s bank subsector and the dollar index indicates the most divergent performance since late 2012. — Reuters
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