The U.S. dollar hasn't been this weak in 3 years. What that means for stock investors

CNBC

21 hours ago

The U.S. dollar index on Thursday hit its lowest level since late March 2022 — putting renewed spotlight on what has been one of the biggest stories in financial markets this year: the weakening greenback. As the world's reserve currency, the U.S. dollar is held in large quantities by global central banks. Key commodities such as gold and oil are priced in dollars. Many foreign transactions, even when American parties aren't involved, also are conducted in dollars. When something that important reaches multiyear lows, investors and consumers alike are forced to consider the implications of the move for U.S. markets and the economy as a whole. At the heart of it is exchange rates. What is the rate at which a foreign buyer can exchange their local currency for dollars? And what is the rate at which Americans can exchange their dollars for foreign currencies? Those who have traveled internationally are likely quite familiar with this. From the investor perspective, the question is how the strength of the dollar plays into our companies' sales and earnings. The U.S. dollar index, which measures the greenback against a basket of foreign currencies including the euro and Japanese yen, has trended lower since January. However, its losses picked up steam after President Donald Trump announced his "Liberation Day" tariffs on April 2. While many assets sold off then and have since recovered, the dollar hasn't shared the same fate. When the dollar is strong, foreign buyers need to trade in more of their local currency — the currency they save and spend in — for U.S. dollars in order to purchase any dollar-denominated goods. Keep in mind: Even if a European purchases an iPhone in euros, those euros are eventually converted to dollars and that conversion rate is going to factor into the euro-denominated price that European shoppers may see in their local store. On the other hand, a weak dollar means that foreign buyers have relatively more buying power. When their local currency strengthens against the dollar, they can trade in fewer local currency units such as euros for an equal number of dollars. In effect, the price has gone down, a dynamic that usually leads to an increase in demand — all else equal. Sales going up because the foreign buyer feels a relative increase in their buying power is one reason why a weaker dollar is generally positive for U.S. companies' overseas business. To be sure, in this scenario, the U.S. company may see an increase in costs for any supplies that it needs to import from foreign countries because their dollars are worth less. However, because companies sell goods and services for more than it costs to make them, the end result is generally a net positive for earnings — the magnitude of that benefit depends, of course, on the share of sales generated outside the U.S. and the makeup of the supply chain. On Microsoft's most recent earnings call, CFO Amy Hood illustrated this dynamic (FX is shorthand for foreign exchange): "With the weakening of the U.S. dollar in April, we now expect FX to increase total revenue growth by 1 point. Within the segments, we expect FX to increase revenue growth by 1 point in Productivity and Business Processes and less than 1 point in Intelligent Cloud and More Personal Computing. We expect FX to increase [cost of goods sold] operating expense growth by less than 1 point." As we see, Microsoft is expecting cost of goods sold to increase at a lower percentage than the benefit to revenue growth. Indeed, we heard similar commentary Thursday from Wall Street veteran and IBM Vice Chair Gary Cohn. Appearing on CNBC's "Squawk Box" on Thursday morning, Cohn affirmed that the weaker dollar is good for IBM. "Yeah, it is," he said. "IBM is an American-based manufacturing company that sells a lot of overseas and repatriates earnings. Think of U.S. domiciled multinational corporations that sell product overseas and report dollar-based earnings." To recap: For investors, a weaker dollar should generally be viewed as a tailwind for foreign sales of U.S. companies — even though some of the benefit may be offset by inputs sourced from foreign markets that are purchased in dollars. The net effect on the bottom line depends on each individual companies' mix of foreign and domestic sales and inputs. There are additional ripple effects on consumer behavior that investors should monitor, beyond the euro-denominated iPhone example we touched on above. Arguably the most important is travel demand, which obviously impacts all sorts of companies including Club name Disney and Bullpen member Airbnb . A weaker dollar means that U.S. citizens traveling abroad will need to convert more dollars than before into the currency of their destination. Consequently, U.S. consumer appetite for international travel should be expected to take a bit of a hit. Back in 2022, when the euro and dollar hit parity for the first time in two decades , everyone was talking about how good it was to be an American traveler going to Europe that summer. It's a different ballgame now. The beneficiaries this summer are foreign travelers coming to the U.S., who will arrive with relatively more buying power than they otherwise would have in January. The U.S. dollar index ended that month around 108. It's around 98 on Thursday. The implication is that a trip to Disney's theme parks in Florida and California is relatively more affordable for intentional travelers than it was just a few months ago. In this way, U.S. companies also may be able to benefit in the domestic market from an increase in foreign tourism — unless there are other countervailing forces that would make them want to travel elsewhere . How does all of this play into our investment decisions? The answer is that it's one data point that we consider in the much larger universe of data. As fundamental investors, we must be aware of the implications of macroeconomic forces such as currency markets. But they do not, by themselves, drive our moves. Consider the case of Apple , where its growth potential in foreign markets is a major opportunity and reason to be optimistic about its future. In that sense, it's reasonable to assume that a weaker dollar would be a positive for the company – and indeed, it is. However, it is not a large enough positive for us to forget about all the other headwinds for Apple. Sure, the dollar is weaker, but it still must deal with tariffs resulting from where its goods are manufactured. There are court battles threatening its lucrative services business. Of course, there's the seeming lack of progress on Apple Intelligence. History suggests Apple is a strong enough operator to navigate these issues – and we are not counting them out of the AI race just yet, given its record-high installed base is a major advantage. The point is that there are much bigger considerations in our investment decisions than currency fluctuations. Or consider the case of Home Depot , which does 92% of sales in the U.S. but sources many goods internationally. The dollar is headwind – to the tune of $275 million in sales in the first quarter – given that the bulk of demand comes from U.S. consumers and the weak dollar serves to increase the supply costs (not unlike an import tariff). However, that is not in our view enough to sell the stock, not when interest rates are expected to decline and in turn provide a boost to the housing market, whether that's through renovations or new building activity. Finally, while we won't get too political, investors should also keep tabs on what is fueling the move in currency markets. In a lot of cases, the "why" behind the move is likely to be far more useful to investors than the absolute strength or weakness of the greenback. In other words, we must ask ourselves what is causing the move, and then ask ourselves what that cause means for our investments. For example, consider a situation where the dollar is weakening simply because interest rates are expected to move lower as the rate of inflation declines – and so there's less demand for U.S. government bonds and the dollars needed to purchase those bonds. That's a pretty solid reason for a weakening dollar and there wouldn't be a cause for concern among investors. On the other hand, if the dollar – or any other currency for that matter – is weakening because investors are growing concerned about the stability in that country, that would likely be cause for concern because it may portend a fundamental shift in capital flow dynamics. In the end though, these are more so concerns for macro-oriented investors. As primarily bottoms-up fundamental investors with a long-term time horizon, we are much more focused on happening with companies themselves — and the industries they're operating in — than we are with the strength of the U.S. dollar in any given stretch of time. (Jim Cramer's Charitable Trust is long HD, DIS and AAPL. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. 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