The recent decline in the dollar is a positive factor for technology companies that derive a greater percentage of their revenue from outside the U.S., as a weaker dollar means foreign income translates into more dollars. The dollar index (DXY00) fell to an 8-month low last week and has weakened by about 11% since climbing to a 20-year high in September.
The dollar index last year rose more than 8%, its biggest gain in 7 years, as the Federal Reserve raised interest rates aggressively to combat inflation. The surging dollar undercut earnings from many international technology companies. However, the recent reversal in the dollar reflects optimism that the Fed could be near a dovish pivot in its rate hike campaign. U.S. Bank Wealth Management said, “currency translations were a big headwind last year, but the fulcrum in the dollar will support earnings and growth.”
The Nasdaq 100 Stock Index ($IUXX) (QQQ) is up 7.9% since the dollar index peaked at a two-decade high in September and has risen for four straight weeks to begin 2023. International Business Machines (IBM) CFO Kavanaugh said that the dollar would stop weighing on growth this year, with dollar weakness bolstering results in the second half of this year. Also, ServiceNow (NOW) said currency fluctuations probably wouldn’t weigh on annual earnings in aggregate this year after they curtailed growth by 4.5 percentage points last year.
UBS Group AG said that the tailwind of a weaker dollar should be felt across the tech sector. UBS said it expects Apple (AAPL) will show softness in iPhone sales when it reports quarterly earnings this Thursday, but the weakness will be offset by foreign exchange trends. The dollar level is a significant factor for Apple’s earnings, as Bloomberg data shows less than half of Apple’s 2022 revenue came from the Americas. Also, Bernstein estimates that the stocks it covers will see a revenue benefit of 1.7% to 4.2% this year from the “dramatically weakening dollar.”
Despite the dollar’s recent weakness, it hasn’t fallen far enough to benefit some technology companies. Microsoft (MSFT), in a conference call last week, said that based on current exchange rates, sales growth this quarter would be about 3 percentage points lower than it otherwise would have been. A more hawkish Fed could end the recent dollar weakness that has been a positive for international stock earnings. Stifel Nicolaus & Co said, “should something cause the Fed to surprise us, we could quickly see a reversal in the dollar.”
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On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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