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Dollar Soaring

The Dollar is Soaring

One little reported fact is the soaring dollar. This change has consequences for the US and global economies and stock markets. Of course, a strong dollar has pros and cons, depending on where you live. But for American consumers, it means cheaper imports and less expensive travel.

The dollar is soaring because of higher interest rates and the view the US is a safe haven with a better-performing economy for now. As a result, the US dollar (USD) is near a 20-year high versus other major currencies. For example, the USD is almost at par with the Euro for the first time in two decades. In another example, the USD converts to 142.50 Japanese yen, the highest since 1998. The dollar is also the strongest against the Pound sterling since the mid-1980s. The chart below shows the magnitude of the change in 2022.

USD Exchange Rate Changes
Source: Reuters
Dollar Soaring
The Dollar is Soaring

Reasons for the Soaring Dollar

Rising Interest Rates

The US Federal Reserve started tightening at the end of 2021. They first stopped buying US Treasuries and Mortgage-Backed Securities (MBS). Afterward, the Fed began reducing its balance sheet. Lastly, the Fed started to raise the Federal Funds rate. Consequently, overseas investors began moving money to the US because the Fed was moving faster than other central banks.

They could earn higher rates on US Treasuries than bonds in their own countries. For instance, the German Bund 10-Year Yield is about 1.69%, while the US 10-Year Yield is almost double at 3.33%. In another example, the Japanese Government Bond 10-Year Yield is only 0.24%.

The Fed will likely raise rates again by 0.75%, and US yields will go higher still, probably further strengthening the US dollar.

Safe Haven

The US is increasingly viewed as a safe haven. Geopolitical events like the war in Ukraine, tension over Taiwan, extreme drought, rampant inflation in developing countries, and recession fears have increasingly caused overseas investors to view the US as a place to park their cash. As a result, they often purchase real estate. This movement of money is another reason why the dollar is strengthening. 

Benefits for the US 

Besides cheaper travel and imports, foreign companies with a lot of US sales will do better. This occurs because every dollar of revenue in America will exchange for more of their native currency.

Traveling Overseas

One main benefit is the US dollar goes further overseas, making it cheaper to travel. The cost of airfare, hotel, restaurants, and shopping is now less in foreign countries. Based solely on exchange rates, it is the best time in years to travel to Great Britain, Europe, Japan, and other countries. Below are some travel destinations to consider.

Another interesting side effect is that expatriates who earn money in dollars will do better. In addition, overseas real estate is now cheaper, making it easier to buy your dream flat in London or a villa in France or Italy.

Imports Are Less Expensive

Another primary advantage is imports are less expensive, helping to curb inflation. French wines and cheese, Italian designer labels, and German luxury cars are all cheaper now. For example, a BMW i8 is roughly $150k. So the exact same vehicle would be about 10% more at the start of the year, all else being equal.

Detriment for the US

At the same time, international travelers will find it more expensive to visit the US affecting tourism hubs like Florida, New York City, and Las Vegas. 

Next, US companies with many exports will suffer. Products from companies like Boeing (BA), Caterpillar (CAT), Deere (DE), and Intel (INTC) will be priced higher overseas. 

Lastly, large US multinational companies will struggle with foreign exchange headwinds affecting revenue and profitability. For instance, McDonald’s (MCD), International Business Machines (IBM), Coca-Cola (KO), Apple (AAPL), etc., have high overseas sales. A stronger dollar means those sales translate to less USD.

Final Thoughts on the Dollar is Soaring

The soaring US dollar is a trend that will likely not end anytime in the foreseeable future. The US Federal Reserve has decided to bring inflation down to its target of 2%, and we are far from there. They have made their intention clear. Interest rates will rise until inflation is brought under control. Consequently, the US dollar will probably strengthen further.


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The Stock of the Week

Today we highlight MDC Holdings (MDC), the Denver-based homebuilder. According to Stock Rover*, the stock price was down approximately 41.1% YTD and nearly 35% in the past 1-year, making it one of the worst-performing, Dividend Challengers. The company operates mainly in Colorado, California, Arizona, Nevada, and Florida, selling homes under its Richmond American brand. Unfortunately, higher mortgage rates and slowing home sales have punished the stock causing the dividend yield to spike and the valuation to plunge.

The forward dividend yield is now ~6.32%, and the price-to-earnings ratio is about 3.36X making the stock ridiculously cheap and a good income stock. Of course, some risk exists that sales will fall further if mortgage rates increase. But the stock should do well because of housing demand and low inventory once interest rates stabilize or reverse. In the meantime, the yield is excellent and supported by a 21% payout ratio.

MDC Valuation
Source: Stock Rover*

Dividend Increases and Reinstatements

Search for a stock in the list of dividend increases and reinstatements. This list is updated weekly. In addition, you can search for your stocks by company name, ticker, and date.

Dividend Cuts and Suspensions List

The dividend cuts and suspensions list was most recently updated at the end of August 2022. As a result, the number of companies on the list has risen to 569. Thus, well over 10% of companies that pay dividends have cut or suspended them since the start of the COVID-19 pandemic. The list is updated monthly.

Six new additions indicate companies are experiencing solid profits and cash flow in August.

The new additions were Mativ Holdings (MATV), Newtek Business (NEWT), Southern Copper (SCCO), Weber (WEBR), Encompass Health (EHC), and Healthcare Realty Trust (FR).

Market Indices


Dow Jones Industrial Averages (DJIA): 31,152 (+2.66%)

NASDAQ: 12,112 (+4.14%)

S&P 500: 4,067 (+3.68%)

Market Valuation

The S&P 500 is trading at a price-to-earnings ratio of 20.55X, and the Schiller P/E Ratio is about 30.43X. These multiples are based on trailing twelve months (TTM) earnings.

Note that the long-term means of these two ratios are approximately 16X and 17X, respectively. 

The market is still overvalued despite the recent market correction and a bear market. Earnings multiples of more than 30X are overvalued based on historical data.

S&P 500 PE Ratio History

SP500 PE Ratio
Source: multpl.com

Shiller PE Ratio History

Shiller PE Ratio
Source: multpl.com

Stock Market Volatility – CBOE VIX

This past week, the CBOE VIX measuring volatility was down nearly 3 points at 22.79. The long-term average is approximately 19 to 20. The CBOE VIX measures the stock market’s expectation of volatility based on S&P 500 Index options. It is commonly referred to as the fear index.

Source: Google

Yield Curve

The two yield curves shown here are the 10-year US Treasury Bond minus the 3-month US Treasury Bill from the NY York Fed and the 10-year US Treasury Bond minus the 2-year US Treasury Bond from the St. Louis Fed.

Inversion of the yield curve has been increasingly viewed as a leading indicator of recessions about two to six quarters ahead, according to the NY Fed. The higher the spread between the two interest rates, the higher the probability of a recession.

10-Year Bond minus 3-Month Bill
Source: NY Fed
Spread Between 2-Year and 10-year US Treasuries
Source: St. Louis Fed

Economic News

The ISM® (Institute for Supply Management®) Non-Manufacturing PMI® reported at 56.9, slightly higher than July’s 56.7 reading. This rise marks the second consecutive monthly increase after three months of declines. A PMI reading over 50 indicates monthly expansion in the services sector, which makes up almost two-thirds of the US economy. The ISM®’s measure of new orders received by services businesses increased to 61.8 from 59.9 in July. The employment measure also moved higher to 50.2 from 49.1. The supplier deliveries index decreased to 54.5 from 58.3 in July. A reading of above 50 percent indicates slowing deliveries. The prices index, a gauge of what services industries pay for inputs, declined for the fourth consecutive month to 71.5.

The US Energy Information Administration (EIA) reported in its September 2022 Short-Term Energy Outlook (STEO) that it expects higher-than-average natural gas prices globally. The US natural gas spot price at the Henry Hub is expected to reach a monthly average of $9.10 per million British thermal units in January 2023, the highest inflation-adjusted monthly average price since 2008. The EIA expects US liquefied natural gas (LNG) exports to reach 11.01 billion cubic feet per day bcfd in 2022 and 12.34 bcfd in 2023, up from a record 9.76 bcfd in 2021. Oil prices are predicted to remain somewhat the same for the rest of the year. Crude production is projected to increase to 11.79 million barrels per day (bpd) in 2022 and 12.63 million bpd in 2023. This is up from 11.25 million bpd in 2021. US coal production is expected to rise to 600 million short tons in 2022, up from 578 million short tons in 2021.

The Labor Department reported a decrease in initial jobless claims for the week ending September 3rd. This marks the fourth straight week of decline. The seasonally adjusted initial claims reported in at 222,000, a decrease of 6,000 from the prior week’s 228,000 (initially 232,000). The four-week moving average, which smooths out volatility was 233,000, a decrease of 7,500 from the previous week’s unrevised average.

Thanks for reading Dollar is Soaring – Week in Review!

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