Stronger Dollar Looms Large This Earnings Season

The dollar has remained steady despite expectations for lower interest rates, posing a challenge for large multinational companies that need to convert foreign profits into the U.S. currency.

The WSJ Dollar Index, which tracks the dollar against a basket of 16 other currencies, rose 1.8% in the 12-month period that ended in June. It has remained steady so far this month and rose 0.4% Tuesday after figures showed U.S. retail sales rose more than expected in June, another sign of resilient consumer spending.

While growth is expected to slow in the U.S., economic activity has also softened overseas amid trade worries, pushing some analysts toward the relative safety of the U.S. currency.

The dollar has stayed stable despite President Trump’s calls for a weaker dollar and claims its strength places the U.S. at a competitive disadvantage. He has also criticized other countries for allowing their currencies to weaken against the dollar.

A stronger dollar makes it more expensive for companies to bring overseas revenues back to the U.S., and several are already feeling the effect of the currency’s strength early in second-quarter earnings season.

Of the 22 S&P 500 companies that have conducted earnings calls through July 11, foreign exchange was cited on more than half as a factor that either hurt second-quarter results or is expected to moving forward, according to FactSet. That was the highest proportion of factors, including trade policy and labor costs.

Jeans company

Levi Strauss

& Co. and appliance maker

Helen of Troy
Ltd.

both cited the negative effect of the dollar on their latest results last week.

“In the conference calls there’s going to be more discussions about the impact of the strong dollar on their earnings numbers than what people are anticipating,” said Omar Aguilar, chief investment officer for equities and multiasset strategies at Charles Schwab Investment Management.

Fears about the dollar’s strength come as many investors brace for a decline in second-quarter earnings for S&P 500 companies from a year earlier. Analysts are wary of a broad slowdown in profit growth that threatens the longest bull market ever.

Although the Federal Reserve is expected to lower interest rates in the U.S. for the first time in more than a decade, other central banks are also easing monetary policy to spur growth.

Investors say strength in the labor market and steady consumer data points have kept the U.S. an attractive region to favor as trade discussions between the U.S. and China continue.

The dollar has consistently defied analyst projections that it will finally soften as the 10-year-old U.S. economic expansion ages.

“That trend may last longer than people had expected coming into the year,” said Mona Mahajan, an investment strategist at Allianz Global Investors.

Elsewhere in debt and currency markets Tuesday, the yield on the benchmark 10-year U.S. Treasury note rose to 2.124% from 2.092% a day earlier.

Bond yields rise as prices fall and logged their highest close since June 12 following the upbeat retail sales figures.

Write to Amrith Ramkumar at amrith.ramkumar@wsj.com

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