Why a rising dollar and falling euro are roiling global markets: Morning roundup

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Friday, 15.07.2022

Today’s newsletter has arrived Jared Blikre, a markets-focused reporter at Yahoo Finance. Follow him on Twitter @SPYJared.

The US Dollar (DX-Y.NYB) is on fire, reaching near parity with the Euro (EUR=X) for the first time in two decades.

The yen (JPY=X) is down 20% against the dollar over the past year – almost unheard of in the modern era.

Bitcoin (BTC-USD) has fallen 70% against the dollar since hitting a record high in November – not unheard of, but painful.

Some of this might be great for Americans shopping or traveling abroad, but the moves are wreaking havoc on global markets and leaving many investors scratching their heads.

After all, the Fed “printed” $9 trillion by buying Treasuries, which might sound like a major devaluation of the dollar. And now the dollar is rising while traditional hedges against inflation like gold are being destroyed.

So: what gives?

There are two key factors at work.

First, interest rates are rising in the US as the Federal Reserve tries to reduce 40-year highs in inflation. And if global investors want to be paid relatively higher interest here, they sell their local currency, buy dollars, invest in US bonds, and pocket the difference. There are hedging costs involved in this so-called “carry trade”, but it is quite simple in theory and a favorite of hedge funds.

Second, foreign investors in weak economies buy the dollar because of its relative safety. Inflation at home is rising and the political situation in the US is messy to say the least, but for now there is no concern among investors that the US government will fail to meet its financial obligations.

Taken together, these haven flows combined with wide interest rate differentials have caused investors to bid for the dollar at an uncomfortable rate.

And much like rising interest rates, big moves in the dollar exchange rate wreak havoc on global investors.

A trader displays US dollar bills at an exchange booth in Karachi, Pakistan, December 3, 2018. REUTERS/Akhtar Soomro

Trades in the normally quiet US Treasury and dollar foreign exchange markets are highly leveraged.

Investors in these markets often want to extract a few basis points — or hundredths of a percent — from a given move. To make these bets, they use huge leverage to magnify small winnings.

This year, the bets in these markets have played out – often chaotically – spilling over into the plain vanilla stock market.

And analyzing the reaction in corporate America, the dollar is wreaking havoc in the C-suite.

According to FactSet, 40% of S&P 500 companies’ total revenue comes from abroad, and the technology and materials sectors generate over 50% of their sales outside the US

One positive that has come out of the rising dollar is a reversal in the recent commodity bubble, which has begun to weigh on oil, gas and grain prices. Lower input prices are great for companies and ultimately consumers, but volatility is the real killer.

If you were an airline trying to hedge your fuel costs earlier this year when WTI crude oil (CL=F) was trading in the $120-per-barrel range — you probably just wasted a lot of money considering the price is now in the mid-nineties.

So as we head into earnings season, we’ll be looking for more clarity on the ramifications of the latest currency swings—and what executives will see in the coming quarters. Analysts will then get down to business and revise their expectations — expectations that are still extremely high by historical standards.

And as we’ve all learned this year, bad news quickly comes at a price.

What to watch today

Economic calendar

8:30 a.m. ET: Empire ManufacturingJuly (-2.0 expected, -1.2 during the previous month),
8:30 a.m. ET: Advance for retail salesmonth-on-month, June (0.9% expected, 0.3% over previous month)
8:30 a.m. ET: Retail trade excluding carsmonth-on-month, June (0.7% expected, 0.5% over previous month)
8:30 a.m. ET: Retail excluding cars and gasmonth-on-month, June (0.1% expected, 0.1% over previous month)
8:30 a.m. ET: Retail Control GroupJune (expected 0.3%, 0.0% during the previous month)
8:30 a.m. ET: Import price indexmonth-on-month, June (0.7% expected, 0.6% over previous month)
8:30 a.m. ET: Import price index excluding oilmonth-on-month, June (expected 0.2%, -0.1% over previous month)
8:30 a.m. ET: Import price indexyear-on-year, June (expected 11.4%, 11.7% during the previous month)
8:30 a.m. ET: Export price indexmonth-on-month, June (1.2% expected, 2.8% over previous month)
8:30 a.m. ET: Export price indexyear-over-year, June (expected 19.9%, 18.97% during the previous month)
9:00 a.m. ET: Bloomberg July United States Economic Survey
9:15 a.m. ET: Industrial productionmonth-on-month, June (expected 0.1%, 0.2% during the previous month, revised downwards to 0.1%)
9:15 a.m. ET: Capacity utilizationJune (80.8% expected, 79.0% during the previous month, revised upwards to 80.8%)
9:15 a.m. ET: Manufacturing (SIC) ProductionJune (-0.1% expected, -0.1% during the previous month)
10:00 a.m. ET: Business suppliesMay (expected 1.4%, 1.2% during the previous month)
10:00 a.m. ET: University of Michigan SentimentJuly preliminary (50 expected, 50 during the previous month)
10:00 a.m. ET: Current conditions of the University of MichiganJuly preliminary (53.7 expected, 53.8 during the previous month)
10:00 a.m. ET: University of Michigan ExpectationsJuly preliminary (47 expected, 47.5 during the previous month)
10:00 a.m. ET: University of Michigan One Year InflationJuly preliminary (5.3 expected, 5.3% over the previous month)
10:00 a.m. ET: University of Michigan 5-10 Year Inflationfinal June (expected 3.0%, 3.1% during the previous month)

Earnings

Pre-market

Wells Fargo ( WFC ) is expected to report adjusted earnings of 80 cents per share on revenue of $17.54 billion
BlackRock ( BLK ) is expected to report adjusted earnings of $7.90 per share on revenue of $4.65 billion
Citigroup (C) is expected to report adjusted earnings of $1.70 per share on revenue of $18.48 billion
BNY Mellon ( BK ) is expected to report adjusted earnings of $1.12 per share on revenue of $4.18 billion
UnitedHealth ( UNH ) is expected to report adjusted earnings of $5.19 per share on revenue of $79.62 billion
Progressive ( PGR ) is expected to report adjusted earnings of 85 cents per share on revenue of $12.39 billion
US Bancorp ( USB ) is expected to report adjusted earnings of $1.07 per share on revenue of $5.92 billion
State Street ( STT ) is expected to report adjusted earnings of $1.73 per share on revenue of $3 billion
PNC Financial (PNC) is expected to report adjusted earnings of $3.14 per share on revenue of $5.14 billion