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A Weak Argument

What a Lower Dollar Might Mean for Stocks

Events have a way of confounding the consensus, but the oft-repeated case for a weaker dollar appears well-founded. A lower buck could boost U.S. corporate profits, rebalance global trade and inflate away some of Uncle Sam’s ticking debt bomb. For investors, a long-term bear market in the dollar could have both positive and negative implications.

To see how the dollar’s status has affected investors in the past, first read about the Bretton Woods conference in July 1944, where the modern global monetary system’s opening chapter was written. The State Department provides a good summary of that 44-nation conference, which established a fixed exchange rate regime that lasted until August 1971. That’s when a growing trade imbalance caused President Nixon to suspend the dollar’s convertibility into gold, a move that not only initiated the floating-rate currency system in use today but also contributed to severe inflation and a difficult decade for stocks.
For context, read an online excerpt from Daniel Yergin and Joseph Stanislaw’s superbly researched book The Commanding Heights. The authors discuss Nixon’s decision to close the so-called gold window and impose wage and price controls. You can also see Nixon’s spin on the crisis by watching the president’s nationally televised speech on YouTube.
The Federal Reserve Board has created a series of dollar indexes to measure the buck’s value against various currencies; for a historical look, visit the central bank’s Foreign Exchange Rates page. Under Nominal Indexes, go to Broad and click Monthly for data showing the greenback’s inflation-adjusted value versus that of currencies from major trading partners. Despite several bull and bear cycles, the dollar has depreciated by about 20 percent in real terms — that is, adjusting for inflation — since 1973.
After the dollar soared to unhealthy heights in the mid-1980s, world monetary authorities convened again, this time at New York City’s Plaza Hotel. There they hammered out the Plaza Accord to drive the buck lower, but it ultimately might have succeeded too well: The dollar’s subsequent 54 percent plunge is thought to have contributed to the 1987 stock market crash.
Though the U.S. currency enjoyed a strong rally during the recent financial crisis, it subsequently dropped 15 percent after many realized economic catastrophe had been averted. A lot of analysts think the dollar is in a primary downtrend that could persist for several years.
From a macro perspective, a lower dollar might trigger higher inflation, causing the overall stock market’s price-earnings ratio to contract. You can monitor the dollar’s contribution to inflation through the import component of the Department of Labor’s U.S. Import and Export Price indexes.
For individual stocks, a weak buck helps companies that generate a significant amount of sales overseas. Unfortunately, there are no free websites that list the percentage of companies’ overseas revenue. Companies that do lots of business abroad, however, are required to footnote their foreign revenue under “segment reporting” on their 10-K filings with the Securities and Exchange Commission. Many large U.S. companies get nearly 50 percent of their sales from overseas, so if a stock you’re researching has a foreign revenue number near that amount, it could be a starting point for further investigation.

Websites of Interest

Bretton Woods conference
Nixon tries price controls
Nixon announces end of Bretton Woods system
Foreign exchange rates
Plaza Accord
U.S. Import and Export Price indexes

Thomas D. Saler is a free-lance financial journalist based in Madison, Wis.

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