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Don't exaggerate dollar strength - BBH

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Nov 19, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Guatemala) - Analysts at BBH explained that most observers tend to emphasis the appreciation of the dollar.

    Key Quotes:

    "While there may be an kernel of truth here, it is important not to exaggerate it. First, although the US is the world's third largest exporter, US companies service foreign demand primarily by building locally and selling locally. This is to say that for various historical reasons, US companies pursued a direct investment strategy rather than the classic export-driven path, like Germany, Switzerland, and China.

    The sales by majority-owned affiliates of US companies outstrip exports by a factor of more than four. One thing that this means is that US companies incur costs in foreign currencies not just revenue. The local wage bill, some times components and other inputs, as well as marketing and storage and transport. Dollar appreciation reduces the dollar value of foreign earnings but it also cuts the dollar value of those labor and other input costs.

    The second explanatory variable for the poorer results from US-based multinational companies is the weaker global economic climate. Although growth in the eurozone has been fairly steady around 0.4% for several quarters, domestic demand remains weak, weighed down by high unemployment. Japan contracted in Q3. China is slowing. Canada contracted for the first five months of the year before snapping back in June. Thus far the recovery is unremarkable

    Although the foreign exchange factor is intuitively clear, and there is some evidence, the more important consideration is demand. This has been borne out in numerous academic studies. The best thing for US exports and foreign sales, more broadly is stronger demand."
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