Updated from 3:05 p.m. EDT
The recent slide in the dollar has some economists worried about inflation and about foreign investors fleeing U.S.-denominated assets, including stocks. But the fall in the dollar also has an upside: It can help boost corporate earnings.
That's because about one-third of the
total profits come from overseas, according to Stan Shipley, an economist at Merrill Lynch. A decline in the value of the dollar makes American goods cheaper to buy abroad and can help companies with currency translations.
U.S. companies that do business overseas are required to translate their profits from local currency into dollars for quarterly and annual financial statements. A strong dollar can sometimes make profits look worse than they actually are.
"If we raise prices, that will eliminate some of the benefit, and that's what typically happens," said Paul Kasriel, chief economist at Northern Trust. "But that doesn't happen immediately. There is typically a lag time, so I would expect
the weakness in the dollar to have some benefit over the short term."
The U.S. currency hit an eight-month low against the euro and a 5 1/2 month low against the yen on Wednesday. Even though the Bank of Japan intervened in foreign exchange markets to halt the dollar's slide and weaken the yen, the dollar barely budged.
The impact of the intervention was not felt in foreign exchange markets because Japanese officials "were generally seen as fighting the tape," according to Marc Chandler, senior vice president and chief currency strategist at HSBC USA.
Chandler said the dollar has retreated this year because expectations of
tightening have been continuously pushed out. In addition, he said, U.S. stocks have underperformed Japanese and European stock markets. Meanwhile, threats of terrorism on U.S. soil have left foreign investors skittish.
One concern is that the decline in the dollar will boost inflation because foreign goods will become more expensive to purchase here.
"It's sort of like the chicken and the egg," Kasriel said. "Does inflation rise because the dollar is weakening or is the dollar weakening because of the rise in inflation?"
Still, several economists agree that the U.S. currency hasn't deteriorated enough to have a marked impact on inflation. In addition, Shipley pointed out that between 1985 and 1987, the dollar fell as much as 50% against some of the major currencies without sparking a significant rise in prices.
"The U.S. economy is less sensitive to changes in currency than Europe is," he said. "We have a more dynamic system."
But just as the dollar hasn't fallen enough to ignite inflationary pressures, neither has it fallen enough to give profits a significant boost this year.
Merrill's Shipley said sectors like consumer staples, technology, basic materials and health care all have a large exposure to overseas markets.
Among those with the biggest exposure abroad are
, with 89% of its sales coming from abroad.
all derive roughly 70% of their sales from overseas, while
derive about 60% of their sales from other countries, according to
"The dollar probably hasn't weakened enough" to impact their revenue, said Kasriel. "But it's a slippery slope; once it starts to fall, foreign exchange markets can move quite rapidly."
Indeed, currency traders say the path of least resistance remains down, and Shipley estimates that if the U.S. currency falls an additional 5% against the yen and the euro, corporate earnings could gain 2% this year as a result.
Still, A.G. Edwards chief economist Gary Thayer believes that the dollar would need to decline as much as 20% from current levels in order to have any meaningful impact on profits.
"The magnitude of this decline isn't significant for corporate earnings," he said, adding that the dollar has turned down several times over the last 18 months only to turn around and head higher with little impact on profits.
Ashraf Laidi, chief currency analyst at MG Financial Group, believes that while the fall in the U.S. currency may be a good thing for some stocks, the disadvantages of a weak currency can often overshadow the advantages.
"A decline can represent a loss of confidence in U.S. assets," he said.
Laidi said the dollar needs to retain its resilience so that foreigners will continue purchasing U.S. corporate bonds and help finance the trade deficit, which currently stands at about 4.5% of GDP. In addition, he noted that the U.S. imports about 20% of the world's exports, meaning that other countries are not likely to stand by and watch the dollar spiral down dramatically.
"The world does not want the dollar to go down any more," he said.