Dollar Pushes to New Highs—With New Risks

Early victim could be tepid recovery in U.S. corporate profits.

By Chelsey Dulaney, Ben Eisen and Ira Iosebashvili

The ICE U.S. Dollar Index, which measures the U.S. currency against six others, reached its highest level in more than 13 years Thursday. Photo: Reuters


The dollar extended its powerful rally Friday, a move that poses new risks to budding optimism about the economy following the U.S. election.

The U.S. currency moved closer to parity with the euro and higher against the yen. In recent days, the dollar has pushed exchange rates lower for emerging markets around the world.

The dollar is rising fast as investors bet that fiscal spending and tax cuts proposed by President-elect Donald Trump will spur U.S. economic growth, and the rising probability that the Federal Reserve will raise interest rates next month. Federal Reserve Chairwoman Janet Yellen said on Thursday that the Fed could act “relatively soon.”




The gains make foreign goods and travel cheaper for U.S. consumers and could give a boost to exports from Japan and Europe. But they also are reigniting fears that the dollar’s strength could slow U.S. corporate profit growth and intensify capital flight from the developing world, which would complicate the prospects for an economic rebound.

The fast move has set off reactions by monetary officials around the world. Indonesia’s central bank has intervened by selling dollars in hopes of slowing the rupiah’s slide. Malaysia, faced with a deep drop in the ringgit, cracked down on trading in the futures market in an effort to damp speculation on the currency. China intervened as well, setting the yuan for several days but using state-owned banks to prevent the currency from falling too far.

Ms. Yellen reminded the Joint Economic Committee of Congress on Thursday that the stronger U.S. currency was already weighing on some U.S. industrial companies.

“Manufacturing output continues to be restrained by the weakness in economic growth abroad and by the appreciation in the U.S. dollar over the past two years,” she said.

Investors are betting on companies that generate most of their revenue in the U.S. and are less exposed to currency fluctuations. Shares in S&P 500 companies with more than 90% of their revenue from inside the U.S., such as Kohl’s Corp., climbed 3.4% since the election through Wednesday.

Shares in companies that generate the majority of their revenue outside the U.S., like International Business Machines Corp., have edged up just 1.9%, according to Bespoke Investment Group.

It could be a self-defeating rally, though. A Goldman Sachs Group Inc. gauge of how restrictive U.S. financial conditions are to growth has risen this week to its highest level since March, indicating tightening financial conditions. The index, which takes into account factors like credit spreads and the level of the dollar, was up to 100.1117 on Wednesday from 99.8766 on Nov. 8, with the dollar’s strength contributing to 84% of its rise since the election.

A stronger dollar tightens financial conditions because it makes it more costly for those outside the U.S. to borrow dollars. It also gives companies less money to spend by restraining profits.

Sharp gains in the U.S. currency can unsettle markets abroad. Prices for raw materials, a main export for many developing countries, can come under pressure because they are denominated in dollars and become more expensive for foreign buyers. Commodities like oil, gold and coal have traded lower in recent days under pressure from the strengthening dollar, analysts say.

Dollar-denominated debt has become more expensive to pay back at a time when these countries are bingeing on it. Emerging-market debt issuance in dollars in 2016 is the largest on record, at $409 billion, eclipsing the previous high of $403 billion set two years ago, according to Dealogic.

There is precedent: The dollar’s 8% rise during the first seven months of 2015 helped precipitate panicked selloffs across global markets that August.

Many investors are already dumping developing-country assets. Nearly $10 billion in foreign investment has flowed out of emerging-market stocks and bonds since the election, Institute of International Finance data show.

China’s yuan fell to eight-year lows this week, stoking fears that the yuan’s weakness might pressure other developing countries to competitively devalue their own currencies.

“The yuan is going down much faster than people had expected,” said Mr. Lewis of Fiera Capital.

“That typically has not been positive for other Asian currencies and other markets.

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