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Multinationals see a new coronavirus red flag on the horizon—a stronger dollar

February 10, 2020, 10:19 AM UTC

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Good morning, and happy Monday to everyone. There’s another busy earnings week on the calendar, but the biggest story today remains China. Everyone wants to know: Will the world’s No. 2 economy re-open fully for business this week?

Market movers

So let’s start there. The Asian markets are mixed despite news over the weekend that the coronavirus outbreak (death toll now at 908, infections above 40,000) has now surpassed the 2003 SARS crisis. Europe is down, and U.S. futures are just above break-even, and slipping, as I type.

On the bright side…Even after Friday’s swoon, the Dow, Nasdaq and S&P 500 are up year-to-date, and European equities had their best week last week in years. So equities are more than holding their own during this uncertain period.

If you’re wondering what’s the biggest loser from the coronavirus outbreak so far—it’s commodities, from Brent crude to copper. If Chinese factories are unable to go fully operational this week, look for more pain there as economists calculate the impact on global trade and growth well beyond Wuhan.

The almighty dollar

As a Yank abroad, I’m a bit of an FX nut. I check dollar performance almost daily, sometimes even before I scan the baseball box scores.

Around Christmas I started noticing a fair number of predictions that 2020 would be something of a reckoning for the greenback. As recently as mid-January, “weakening dollar” headlines were predicting a lift for commodities and for American multinationals.

Coronavirus has all but wiped out that talk.

The dollar, while down slightly today, is the ultimate safe haven. It tends to climb during periods of great uncertainty. That’s proved axiomatic during the coronavirus outbreak.

The conventional wisdom is that should the coronavirus outbreak extend into the second quarter, various sectors will suffer and, conversely, traditional safe havens—the dollar—will fare well. Such a scenario would have big ripple effects. A strong dollar makes exports more expensive, which messes with the competitiveness of American companies abroad.

As the Wall Street Journal noted over the weekend, American multinationals in various sectors, including 3M, Ford Motor Co., Johnson & Johnson and Coca-Cola, have all warned of “the negative effects of currency swings on earnings calls.”

Today’s chart reveals what they’re seeing: a rapidly climbing dollar over the past month.

In the FX world, a 1.7% climb (as measured by the U.S. Dollar Index) in a little over three weeks is an impressive gain, one that will get the attention of CFOs.

The concern is that a sustained rally by the greenback could impact the earnings of multinationals in upcoming quarters. Add to the strong dollar supply chain disruptions, a China slowdown and global trade shocks and you can see how this contagion could exacerbate the biggest vulnerabilities in the global economy.

Something to watch.

***

A quick shout-out to all those newsletter readers who have sent me their predictions on Dow 30,000. If you haven’t done so, there’s still time. Drop me a note.

Have a good day.

Bernhard Warner
@BernhardWarner
Bernhard.Warner@Fortune.com

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