NEW YORK (Reuters) - Wall Street's secret weapon last year was a declining dollar, which provided extra firepower to nudge corporate earnings higher when a shaky recovery was just getting under way.
Officially, Washington always supports a strong dollar. The dirty little secret, though, is that U.S. policy makers love to see it drop like it did last year, since this bolsters exports and boosts corporate profits -- both of which help American stocks.
But now that the currency is rising in value, will U.S. stocks go the opposite way?
Not necessarily, say market strategists. Indeed, some see the greenback's recovery benefiting stocks at this point. A more stable dollar could buy more time for an equities rally, now well into its second year, by enticing foreign investors who have been sitting on the sidelines, they say. It could also dampen growing fears of inflation by reducing the cost of dollar-denominated commodities like oil and copper and help prevent a rise in interest rates.
"It would be a problem if the dollar really started a strong rally," said Milton Ezrati of Lord Abbett and Co. "But if it simply holds where it is, that would probably be the best possible outcome for financial markets."
In the latest week, stocks have risen slightly, as the dollar climbed to its highest in a month, dropping the euro to $1.24. Last week, the euro hit its all-time high of $1.29 versus the dollar, capping a rise of 57 percent from October 2000.
BOTTOM FOR DOLLAR
While the conventional wisdom is that the dollar could go still lower, some forecasters are saying the currency might be set to hit bottom soon. It's nearing historic trend lines at which it starts to reverse course. But what, if anything, would a strong dollar recovery mean for U.S. equites?
"It's hard to show just how much impact the dollar has on equities," says Avi Nachmany, director of research at Strategic Insights, a research firm that tracks fund flows.
But he adds that "you can see its impact on the flip-side." While the dollar was falling to new lows in recent months "there has been a dramatic acceleration of demand for international investments from U.S. fund investors."
In January, with the dollar hitting new lows, U.S. investors were socking cash into foreign funds at the highest level in years, Nachmany said. Some $16 billion went into global funds in January alone, out of a total $60 billion for all equity and "balanced" bond-plus-stock funds.
A recovery of the dollar, at least, might stanch the flow of money into foreign markets and possibly attract some foreign capital into U.S. markets, Nachmany said.
The biggest concern for the equity markets, though, is corporate earnings and interest rates, said Drew Matus, U.S. financial markets economist for Lehman Brothers. The dollar is only a secondary concern. The market this week was more influenced by the talk of a European rate cut than the fact that the euro was declining against the dollar.
EUROPEAN RATE CUT
"A European rate cut would stimulate the worldwide economy and that's beneficial for everyone's economy, Asia, Europe, the U.S," Matus said. "It would help our exports."
The dollar is an interesting sideshow, Matus concedes, as are European interest rates. But the real show is the same one that's been featured for months -- the course of job creation in the United States. Nearly everyone in the financial markets in the United States remains focused on the slow pace of job growth, he said.
The government next Friday will release data on February employment. Optimism grew this week over a report that gross domestic product grew at a relatively healthy 4.1 percent in the fourth quarter, paced by a 15 percent rise in capital spending and software investment. That doesn't mean businesses are creating new jobs, but somebody has to run the new equipment.
Lord Abbett's Ezrati says investors have gotten overly pessimistic about the prospects for the economy and the market.
"The U.S. economy is continuing to expand, earnings growth will go up with it -- and that's the quintessential support for stocks, the most fundamental of fundamentals," Ezrati said.
What it all adds up to, he said, is a market that is 10 percent to 15 percent underpriced and has room to go up.
Lehman's Matus, however, says more job growth is needed to justify more optimism. "It's all about job growth," he said. "That creates income and gets people buying things. It starts everything. How will equity markets react if there is no job growth? It's one of the things we're all trying to figure out."
For the week, the Dow fell 0.3 percent to 10,583.92, the S&P 500 rose 0.1 percent to 1,144.94 and the Nasdaq fell 0.4 percent to 2,029.82.
Officially, Washington always supports a strong dollar. The dirty little secret, though, is that U.S. policy makers love to see it drop like it did last year, since this bolsters exports and boosts corporate profits -- both of which help American stocks.
But now that the currency is rising in value, will U.S. stocks go the opposite way?
Not necessarily, say market strategists. Indeed, some see the greenback's recovery benefiting stocks at this point. A more stable dollar could buy more time for an equities rally, now well into its second year, by enticing foreign investors who have been sitting on the sidelines, they say. It could also dampen growing fears of inflation by reducing the cost of dollar-denominated commodities like oil and copper and help prevent a rise in interest rates.
"It would be a problem if the dollar really started a strong rally," said Milton Ezrati of Lord Abbett and Co. "But if it simply holds where it is, that would probably be the best possible outcome for financial markets."
In the latest week, stocks have risen slightly, as the dollar climbed to its highest in a month, dropping the euro to $1.24. Last week, the euro hit its all-time high of $1.29 versus the dollar, capping a rise of 57 percent from October 2000.
BOTTOM FOR DOLLAR
While the conventional wisdom is that the dollar could go still lower, some forecasters are saying the currency might be set to hit bottom soon. It's nearing historic trend lines at which it starts to reverse course. But what, if anything, would a strong dollar recovery mean for U.S. equites?
"It's hard to show just how much impact the dollar has on equities," says Avi Nachmany, director of research at Strategic Insights, a research firm that tracks fund flows.
But he adds that "you can see its impact on the flip-side." While the dollar was falling to new lows in recent months "there has been a dramatic acceleration of demand for international investments from U.S. fund investors."
In January, with the dollar hitting new lows, U.S. investors were socking cash into foreign funds at the highest level in years, Nachmany said. Some $16 billion went into global funds in January alone, out of a total $60 billion for all equity and "balanced" bond-plus-stock funds.
A recovery of the dollar, at least, might stanch the flow of money into foreign markets and possibly attract some foreign capital into U.S. markets, Nachmany said.
The biggest concern for the equity markets, though, is corporate earnings and interest rates, said Drew Matus, U.S. financial markets economist for Lehman Brothers. The dollar is only a secondary concern. The market this week was more influenced by the talk of a European rate cut than the fact that the euro was declining against the dollar.
EUROPEAN RATE CUT
"A European rate cut would stimulate the worldwide economy and that's beneficial for everyone's economy, Asia, Europe, the U.S," Matus said. "It would help our exports."
The dollar is an interesting sideshow, Matus concedes, as are European interest rates. But the real show is the same one that's been featured for months -- the course of job creation in the United States. Nearly everyone in the financial markets in the United States remains focused on the slow pace of job growth, he said.
The government next Friday will release data on February employment. Optimism grew this week over a report that gross domestic product grew at a relatively healthy 4.1 percent in the fourth quarter, paced by a 15 percent rise in capital spending and software investment. That doesn't mean businesses are creating new jobs, but somebody has to run the new equipment.
Lord Abbett's Ezrati says investors have gotten overly pessimistic about the prospects for the economy and the market.
"The U.S. economy is continuing to expand, earnings growth will go up with it -- and that's the quintessential support for stocks, the most fundamental of fundamentals," Ezrati said.
What it all adds up to, he said, is a market that is 10 percent to 15 percent underpriced and has room to go up.
Lehman's Matus, however, says more job growth is needed to justify more optimism. "It's all about job growth," he said. "That creates income and gets people buying things. It starts everything. How will equity markets react if there is no job growth? It's one of the things we're all trying to figure out."
For the week, the Dow fell 0.3 percent to 10,583.92, the S&P 500 rose 0.1 percent to 1,144.94 and the Nasdaq fell 0.4 percent to 2,029.82.
