The U.S. dollar index raced ahead to a 16-month high on Tuesday and kept right on chugging ahead on Wednesday. That comes as eurozone growth falters, the U.S. economy has accelerated and President Donald Trump threatens to escalate China tariffs. While dollar strength hasn't kept the Dow Jones industrial average, S&P 500 index or Nasdaq composite from staging a big rally the past two days, it is a warning signal.
XDollar Soars Amid Fed Rate Hikes
The dollar's strength depresses the profits of U.S. multinationals, since it reduces the dollar-based value of sales booked in foreign currencies by U.S. multinationals. Dollar strength also is a negative for global growth, since it makes it harder for emerging markets to pay back dollar-based loans.
A hawkish Fed, which is expected to hike its key interest rate for the eighth time in two years in December, has contributed to dollar strength. The dollar's key global role effectively makes the Fed the world's central bank. Other major central banks have not raised rates, with monetary stimulus continuing.
The dollar's latest surge came as third-quarter eurozone GDP growth slipped to just 0.2% (not annualized) vs. Q2.
Stock Market Rallies
The U.S. dollar index, which measures the greenback vs. a basket of advanced economy currencies, rose as high as 97.19. That's up nearly 5.5% since the start of the year and the highest since June 2017. So far investors jumping into the stock market rally are shrugging off the dollar's strength. The Dow Jones, S&P 500 index and Nasdaq rebounded 1.6%-1.8% on Tuesday. Wall Street pushed higher in Wednesday's stock market trading, with the Dow Jones up 1%, the S&P 500 1.1% and the Nasdaq 2%.
Slower S&P 500 Earnings Growth In 2019
The impact of escalating tariffs, a stronger dollar, slower global growth and higher interest rates could cut S&P 500 company earnings growth to 5%-6% in 2019 vs. Wall Street expectations of about 10%, David Bianco, chief investment officer in the Americas for DWS, wrote in a Monday note.
"The tariffs will have a small effect on U.S. gross domestic product, but a more significant effect on S&P earnings per share," Bianco wrote.
The effect of a strong dollar on global growth and S&P 500 earnings is a key reason why Wall Street is becoming wary of the divergence between the U.S., with its best spurt of growth in several years, and tame or slowing growth in much of the world.
But the Fed doesn't bear all the responsibility for the dollar's strength. Escalating Trump tariffs have slowed China's economy, which is a big driver of global growth.
On Monday, Bloomberg reported that Trump is upping the ante for his big meeting in late November with Chinese President Xi Jinping.
Wall Street has eyed the meeting as the last chance to avoid a big escalation of the China trade war. Trump tariffs on $200 billion in Chinese imports are set to jump from 10% to 25% on Jan. 1. Yet the stakes just got a lot bigger. If the Trump-Xi meeting doesn't produce results, Trump will order tariffs on the remaining roughly $267 billion in Chinese imports that have yet to be targeted.
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