NEW YORK (TheStreet) -- Is this the end of the era when the profits of large multinational U.S. companies are protected by the U.S. government's policy of a weak dollar?
This is a big week for earnings, including IBM (IBM) - Get International Business Machines (IBM) Report, General Motors (GM) - Get General Motors Company (GM) Report, United Technologies (UTX) - Get United Technologies Corporation Report, Coca-Cola (KO) - Get Coca-Cola Company Report and McDonald's (MCD) - Get McDonald's Corporation (MCD) Report and others. Next week, more major companies will be reporting earnings, including Apple (AAPL) - Get Apple Inc. (AAPL) Report and other technology firms. The expectation is that these reports will not be that good because of the rise in the value of the U.S. dollar.
Although the rise in the value of the dollar has been quite substantial over the past 12 months, it has only been in the last four or five months that the impact of this increase on corporate profits has been felt.
The value of the U.S. dollar is expected to stay strong for the near term and even possibly rise higher as the Greek situation in the Eurozone worsens and the Federal Reserve starts to raise short-term interest rates.
The issue of falling profits at multinational U.S. companies will eventually become a political problem if the weakness in earnings continues. This situation occurred in the 1980s as the Paul Volcker-led Federal Reserve tightened up on monetary policy, forcing short-term interest rates to post-World War II highs and causing a major increase in the value of the U.S. dollar.
The peak in the value of the dollar during the Volcker-era came in early 1985 from a low point in 1979 when Volcker became chairman of the Board of Governors of the Federal Reserve System. In 1984, after corporate profits suffered in part from the rising value of the dollar, large U.S. corporations began arguing for the government to introduce trade protections. Fortunately, as events moved on and the Fed began to ease up on its monetary policy, the demand for protective legislation receded.
This history comes to mind because of the evolving scenario that is now unfolding and the new trade agreement that President Obama and the Republicans in Congress support.
As mentioned above, the value of the U.S. dollar is expected to remain where it is or to trend upwards a little more.
The United States is at the point of its monetary cycle that short-term interest rates are expected to rise in the near future, something that will contribute to the strong dollar. The United States economy, growing as slowly as it is, is still one of the faster growing economies in the developed world.
In Europe and in Japan, the central banks are still attempting to stimulate their economies with continued applications of quantitative easing. The International Monetary Fund, this past weekend, released information that indicated that world economies were weaker than had been previously thought.
All of these factors seem to be pointing to a continuation of a strong dollar.
If this is the case, then one could also argue that all these factors point to a reduction in the revenues of the large multinational U.S. companies, accompanied by a further decline in profits. A further decline in profits can result in weak stock market prices and a decline in wealth.
In such a scenario, as in the past, there will be rising pressure for the United States government to move into a more protectionist stance.
This would not be the right move. The world is moving into a new economic era and this would only set the United States further back in its need to restructure and reform its competitive capabilities.
A strong dollar may cause the profits of big companies to be less than they might have been if the dollar were weaker, but this is something the country is going to have to face in its transition from being the economic hegemon of the world to a strong power in a world with many strong powers.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.