Dollar Rally Hurting U.S. Corporate Profits

I warned about this already last year, and now Marketwatch also reports that the overvalued U.S. dollar is inflicting great damage to U.S. corporate profits.

This negative effect occurs because this will force U.S. exporters to lose market share or reduce their margins (or a combination of the two) and also because the dollar value of the profits of foreign subsidiaries of U.S. companies will go down if the value of foreign currencies go down versus the U.S. dollar. Some of this negative effect will be counteracted by lower cost of input for U.S.-based firms, but the overall net effect is still clearly negative.

The negative effect on the dollar value of profits of foreign subsidiaries was also confirmed in the flow of funds report that I discussed in the previous report. There it was reported that net profit from abroad fell from $421 billion to $287 billion (though some of that decline likely reflected economic weakness in other countries). As the dollar has strengthened further since then and as there is always a time lag due to the use of futures contracts, this effect will be even greater in the coming quarters.

This factor is yet another reason for believing that this week's rally is simply another bear market rally (or suckers rally), not the beginning of a new bull market.