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By: Steve Sosnick Chief Strategist at Interactive Brokers

This morning, US markets reopened after being closed for the Independence Day holiday. It appears today that not all the fireworks were used over the weekend. The US dollar is being launched skyward today. The headlines are focused on the potential for the Euro to reach parity with the dollar, but the moves are across a wide range of currencies.

The US Dollar Index (DXY) is up about 1% to levels not seen about 20 years. It is up about 11% since the start of 2022 alone. Money is clearly moving into the dollar from a wide range of international currencies. Some of that flow is risk aversion. When markets are in a “risk-off” mode, money flows from risky assets into safer alternative.US fixed income is considered one of the world’s safest havens, and the flows are helping push rates lower across the curve after rising overnight. 

The push into the dollar is helping on the inflationary front. More valuable dollars mean that fewer are required to purchase real goods. We see commodity prices lower across the board, with declines of about 4% in oil, corn, wheat, and soybeans. Gold is tracking about 2% lower, though on a day like today it is hard to determine whether gold is reacting to lower commodity prices or a stronger dollar.

Large-cap stocks are not fans of the stronger dollar, however. Most leading stocks are multi-national corporations, meaning that they earn money around the world. Those international revenues and profits are translated into US dollars. As the dollar rises, the value of their foreign income shrinks, reducing reported income. Microsoft (MSFT) warned of this about a month ago, but we have not yet heard a chorus of other companies following along yet.

This last factor is crucial as we head into earnings season. There has been some debate about whether analyst expectations for second-quarter earnings are too high. That is certainly a cause for concern, but think it is prudent to worry just as much – if not more – about forward guidance. The rising dollar could have certainly impacted Q2 earnings and it is likely to be a topic of discussion during earnings calls. Looking backward, it is entirely possible that companies either hedged their foreign currency exposure or viewed it as somewhat temporary. If we launch into the heart of earnings season – later this month, in case you’d forgotten – with the dollar continuing its rise, it seems implausible that multi-national CEOs will be able to refer to currency translation as anything but a headwind.

Unfortunately, we also can’t extricate recession worries from the general market tone. The Atlanta Fed’s GDPNow forecast for Q2 GDP has plunged precipitously, sinking to -2.1% last week. If we use the common rubric of two negative quarters defining a recession, then we’re likely there. The NBER, which is the arbiter of US recessions, has a more complex rubric. The problem for those of us who invest and trade in the here and now is that the NBER is backward-looking and somewhat arbitrary. Those of us who trade in the here and now are hearing the recessionary footsteps.

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