Dividends and Greenback’s gains could hinder US recovery effort

In investing there are always a multiple of aspects to consider and sometimes one is more important than the other. The US Dollar or the Greenback value to the rest of the world’s currency is an important consideration for any company doing business outside the US. In investments, we often want diversification so that if one area is now doing as well as expected, another area can make up for it. For example, for the US automakers, the biggest market outside the US is China and all automakers make and sell vehicles in China. The money made in China comes back to the US and there are currency concerns. When the US Dollar is stable, no one worries, but what if the US dollar gains against the rest of the world’s currencies?

In an article by Saikat Chatterjee of Reuters, the dollar had weakened 4.4% in the final quarter of 2020, a trend that helps recovery. The US dollar has gained 3% in the past month. Gains mean sizable outflows from emerging markets to the greenback.

Goldman Sachs Group predicts the US economy will expand 7.7% this year and that should mean more jobs.

Aaron Hurd, a portfolio manager who helps manage $145.3 billion in assets at State Street Global Markets, noted usually a healthy US economy benefits the rest of the world. But the rebound in US growth is allowing the US a 3 to 6 month advantage.

Dollar bears have to run for cover, hedge funds short dollar positions were at $29 billion which is well above historical levels of $9 billion. At the end of January the short was $36 billion.

Analysis by the Bank for International Settlement found that every 1% rise in the dollar shaved 0.3% from the growth outlook of emerging markets studied.

A rising dollar and higher US bond yields pose problems for countries and companies with big debts. There is a run to safety of the US dollar.

Linking to dividend paying stocks, when you buy into the companies, often they have relationships with companies around the world but there is stability in the US economy. Similar to the environment – all things are connected so are the financial markets – all things are connected to the many moving parts. As long as your company is staying close to vanilla solutions, you have little to worry about. Ask or look into how does your company hedge its currency situation.

There are more questions than answers, till the next time – to raising questions.

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