How A Strong Dollar Will Affect Stocks

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Everyone is talking about USD/JPY and the big breakout move that it experienced over the last 48 hours and while we do not underestimate the significance of breaking 100, we think that it is extremely important for investors to realize that this is not a USD/JPY story but a broader story of U.S. dollar strength. The greenback has soared against all of the major currencies and ends the week at 4 year highs against the JPY, 1 month highs against the EUR and NZD, 10 month highs against the AUD and 8 month highs against the CHF. No U.S. economic data was released today but the dollar extended higher after a speech from Bernanke. Traders were relieved that Bernanke did not say anything to imply that the Federal Reserve will rejoin the currency war by increasing stimulus or talking down its currency.

Just as equities can have an impact on currencies, currencies can also affect equities, which is why the move in the dollar is getting so much attention from stock traders. We know that a strong currency hurts exporters and benefits importers ,but the foreign earnings of multinational corporations will also be negatively affected by a strong currency. In fact, many U.S. companies blamed the strength of the dollar for weaker earnings in the first quarter and the impact was seen in companies across different industries. Three high profile examples are 3M (NYSE:MMM), Phillip Morris (NYSE:PM) and Avon (NYSE:AVP). The cigarette maker took a 7-cent hit on currency fluctuations, which actually turned its 1 cent profit into losses in Q1. Avon, which generates over 85% of its total revenue from outside of the U.S., saw currency fluctuations shave 4% off of earnings. If the dollar continues to rise due to diverging monetary policy directions, we can expect more disappointments in Q2 earnings. As a result, it will be extremely important for U.S. investors to look beneath the hood and examine more carefully where the companies they are invested in generate most of their revenue -- domestically or abroad.

The rally in USD/JPY in particular has benefited some foreign companies listed on U.S. exchanges and hurt others. Two NYSE listed stocks that come to mind are Toyota (NYSE:TM) and LG Displays (NYSE:LPL). Toyota is a Japanese company that will benefit from the latest weakness in the Japanese yen, and LG is a Korean company that will be hurt by yen weakness because it competes heavily with Japanese companies. Over the past month, the Korean won has increased more than 7% in value against the yen, which basically means that Korean goods have become 7% more expensive.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.