December 7, 2022

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Currencies, stocks hardest hit by the dollar’s strength. How important is the US PCE index

The EUR/USD exchange rate barely moved at 0.9865 (-0.05%) after the single currency glimpsed the $0.99 threshold, for the first time since October 6, pending the European Central Bank meeting on Thursday, October 27 (a rate hike of 75 basis points is expected). The yen remains stable below the threshold of 149 against the dollar (148.88, +0.18%) after the interventions of the Bank of Japan Which is likely to maintain monetary stimulus at its meeting on Friday, October 28, while the Federal Reserve is likely to raise interest rates by 75 basis points on November 2.

How important is the US PCE index

The dollar index also settled at 111.90. “Market expectations for the Fed’s final interest rate, the level at which the bull cycle is expected to break, finally broke through the 5% level last week, despite the scarcity of macroeconomic data,” he said. Ebrey’s team noted, remembering that Daly and Evans were the first Fed officials to step in after this psychological level was crossed and seemed to suggest it might have been a bit too high for their standards.

The next milestone in this unprecedented cycle of highs will be the publication of the PCE (a US indicator that measures the average price increase for domestic personal consumption, ed.) on Friday, October 28. “All eyes are on this month’s fundamental data, and while it is an annualized level close to 6%, a downside surprise could have a disproportionately negative impact on the dollar given the consensus and market positioning for an increasingly stronger dollar.” They pointed to Iberi.

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The repercussions of the dollar’s dominance on global market trends

The new dominance of the dollar continues to have strong implications for the health of public finances and for corporate balance sheets. The strength of the US currency is automatically translated into a decrease in the value of other currencies, as in the case of the euro. In fact, the EUR/USD pair has lost 13% of its value over the year and this may just be the beginning, according to Michele Sanson, iBanFirst country manager. As President Joe Biden also pointed out, the dollar continues to hold the reins, but the inflation scenario affects the entire world.

Stocks hardest hit by the dollar’s strength

Using data from Morningstar asset managers and State Street Global Advisors (particularly European ETFs, which track the performance of the major listed sectors), it is possible to get an idea of ​​each sector’s exposure to dollar fluctuations. “In the US, for example, big tech players like Meta, Amazon and Apple are affected by the strength of the dollar. A somewhat logical scenario given that their market is global and, in many cases, more than half of their revenue comes from outside of the country,” said Samson. United State”.

Behind this group of leaders are the basic materials sector (companies that produce metals, chemicals or non-ferrous metals) and the telecom services sector. Some US companies are particularly exposed to the strength of the dollar, especially those that operate internationally. An American company that generates a portion of its sales in Europe will automatically, on a consistent basis, record a decrease in net profit due to unfavorable exchange rates once the earnings of its European subsidiaries are returned and consolidated into dollars.

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“We expect a bottom of 0.90 over the winter, as a direct result of the upcoming supply difficulties. But we are not the most pessimistic. Citi strategists expect the euro to fall to 0.86. Risk of eurozone recession and energy crisis,” explained iBanFirst Italy Country Director , who sees that the dollar’s dominance is at the same time a “cause and a symptom” of the European continent’s loss of attractiveness as it suffers the brunt of staggering inflation fueled by an energy crisis exacerbated by unfavorable exchange rates for imported materials.

Stocks least affected

However, in Europe, some groups should emerge stronger. This is the case with companies in the healthcare sector, the main beneficiaries because they get a greater share of their revenue from the US market than others. In second and third place, according to the expert, there are respectively consumer goods (electronics, clothing and luxury goods, for example) and the manufacturing sector. Conversely, companies operating in the utilities, construction, and finance sectors (the latter often absent from the US market due to entry barriers and legal risks) are less exposed in terms of sales.

“An excessively strong dollar is an accelerating factor for a recession that generally begins in emerging countries, which are particularly sensitive to exchange rate fluctuations. The Eurozone is also in the lead. And while economists continue to argue about the ideal level for the EUR/USD pair from a point of view. From an economic standpoint, there is little doubt that a sub-par euro is a problem,” Samson added. “As in the case of health crises, no geographic region can consider itself immune to a very strong dollar. Imported inflation will eventually contaminate the global economy.” (All rights reserved)

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