Strong dollar hurting earnings

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The sudden surge in the U.S. dollar over the past year has been wreaking havoc on revenue in the latest earnings reports.

“I think a lot of it is the sense of divergence in central bank monetary policy,” said William Delwiche, investment strategist at Milwaukee-based Robert W. Baird & Co. Inc. “The U.S. Fed is, if not actually getting tighter, at least talking about getting tighter.”

At the same time, the European Central Bank and other central banks around the world are adopting looser policies. As a result, there are fewer dollars and more foreign currencies, which makes the value of the dollar go up.

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The strong dollar is putting pressure on earnings for companies with a lot of foreign sales, since translating foreign currency back into dollars is costly right now, said Doug Ramsey, chief investment officer at Minneapolis-based Leuthold Weeden Capital Management, at a Cleary Gull luncheon in Milwaukee last week.

“This has been an extraordinary move in the dollar in the last 12 months,” he said.

Milwaukee-based mining equipment manufacturer Joy Global Inc., Milwaukee-based identification solutions manufacturer Brady Corp., Waukesha-based generator manufacturer Generac Holdings Inc., Brookfield-based financial technology developer Fiserv Inc., Racine-based outdoor recreation equipment manufacturer Johnson Outdoors Inc., Milwaukee-based flavor and fragrance manufacturer Sensient Technologies Corp., Kenosha-based tool manufacturer Snap-on Inc., Milwaukee-based process and motion control product manufacturer Rexnord Corp., Racine-based thermal management product manufacturer Modine Manufacturing Co., Milwaukee-based Rockwell Automation Inc., and other companies all cited foreign currency translation as having a negative impact on earnings in their most recent reports.

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In addition to impacting earnings, the strong dollar may have driven higher domestic demand for foreign products, according to The Wall Street Journal, which reported the March expansion in the U.S. trade gap was the largest in almost 20 years.

In the short-term, the rally in the dollar has slowed, though there’s enough long-term momentum that it could drift higher. The rate at which the value increases should relax going forward, Delwiche said.

Investor sentiment, though, hasn’t been dampened.

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“Investor optimism is quite high right now,” Delwiche said. “It does, though, set a higher bar for earnings growth going forward.”

While the rise in the value of the dollar has been dramatic, it will eventually right itself, he said.

“I think the important thing is that a lot of current effects are somewhat transitory,” Delwiche said. “Over the long run, you make up for that by having it be a tailwind at some point in the future.”

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