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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: TobagoJack who wrote (39819)	10/19/2003 11:17:46 PM
From: elmatador	Respond to of 74559

USD slide may eventually force a rise in US interest rates - which are at their lowest levels in two generations and have played a crucial role in the revival of the US economy. Told that over the weekend but AC didn't want to accpet. US has no choice but to allow the dollar to weaken, especially against Asian currencies - a stance that appeared to be reinforced by the Group of Seven Dubai statement on exchange rates last month. Falling dollar's role in rising US profits By Vincent Boland Published: October 19 2003 20:22 \| Last Updated: October 19 2003 20:22 A succession of big US corporate names joined the list of companies posting strong earnings growth last week, and the stock market continued to climb, pushing the S&P 500 index to a 16-month high. Among the mix of factors driving this growth in earnings and stock prices, one in particular is not getting the credit it deserves: the slide in the value of the US dollar against the currencies of the US's main trading partners. Some chief executives have acknowledged the role of a weakening dollar in the conversion of profits from their overseas affiliates, but the rebound in the US economy is seen as the main reason why earnings are growing so fast. Nevertheless, the performance of the dollar speaks volumes about which direction the stock market takes. James Paulsen, chief investment strategist at Wells Capital Management, says the demise of the 1990s bull market was closely linked to a rising dollar. The end of the three-year bear market is similarly linked to the currency's slide, which began in the middle of last year and still continues,although at a slower pace. "The dollar played a critical role in ending the great 1990s profit cycle and it is kick-starting the current profits cycle," Mr Paulsen says. The S&P 500 index has risen by 31 per cent since its low point in mid-March, and by nearly 19 per cent since the start of the year. In the same periods, the dollar's value according to a trade-weighted index against a basket of currencies has declined by 6 per cent and 9.6 per cent respectively. A euro cost $1.05 at the end of 2002, $1.19 at the end of May, and $1.17 this week. Corporate earnings growth, meanwhile, has rarely been so robust. With the reporting season for third-quarter figures now under way, most companies are posting results ahead of Wall Street expectations. According to Thomson/First Call, the rate of earnings growth should be 16.1 per cent in the third quarter, and 21.9 per cent in the fourth, after similar surges in the first half of the year. At least two percentage points of the second quarter's earnings growth is directly attributable to the weak dollar, analysts say. "It's a textbook example of the impact of the currency on the translation element of earnings," says Ashraf Laidi, chief currency analyst at MG Financial Group. The proportion of profits earned by US companies outside the US has varied sharply in the past three years. Joseph Quinlan, chief market strategist at Bank of America's capital management arm, estimates that US companies have 23,000 overseas affiliates, and that about 30 per cent of the profits of S&P 500 companies comes from abroad. According to the Bureau of Economic Analysis, an agency of the Commerce Department, profits of overseas affiliates rose by $1.7bn (£1.02bn) in the second quarter of 2003, after tumbling by $7.6bn in the first. BEA figures show that annual profits earned overseas peaked at $150.8bn in 2001, fell to $119.3bn in 2002 and continued to slide, to an annualised $106.5bn, in the first quarter of 2003. They rose slightly to $108.2bn in the second quarter - about 12 per cent of the total annualised profits of US companies in that quarter. The three most important overseas markets for US companies' earnings are the UK, Canada and Japan, in that order. This means that the dollar/euro exchange rate has much less impact on earnings or on the value of stocks than the dollar/ sterling or dollar/yen rates. US companies earned more in Japan in 2002 - $6.8bn in foreign affiliate income - than the combined earnings of US companies' operations in France and Germany, Mr Quinlan says. However, foreign-affiliate profits are not the only beneficiaries of a weakening dollar. It also has an impact on a company's domestic earnings. Analysts also say that the long slide in the value of the dollar is finally feeding through to higher exports and better margins, further boosting profitability. The dollar's slide may eventually force a rise in US interest rates - which are at their lowest levels in two generations and have played a crucial role in the revival of the US economy. But, as the US trade deficit continues to widen, most observers say the US has no choice but to allow the dollar to weaken, especially against Asian currencies - a stance that appeared to be reinforced by the Group of Seven Dubai statement on exchange rates last month. "The US trade deficit is so large [and rising] that the dollar has to go in the other direction in order to provide a bit of balance," Mr Paulsen says.