Dollar Strengthens As Rate Cut Hopes Fade: 4 Winners

A popular gauge of the strength of the greenback is near a three-week high. The ICE (NYSE:ICE) U.S. Dollar Index, which measures dollar’s strength against a basket of major currencies, remained little changed at 97.374, which is close to a three-week high of 97.443 hit last week.

So, what’s driving the dollar? Initially, the Fed was expected to lower rates as the U.S. economy wasn’t in good shape. After all, reports on the service sector and trade were discouraging. The Institute for Supply Management’s nonmanufacturing index fell to 55.1% in June from 56.9% in May, below expectations of 55.9%. U.S. factory orders, in the meanwhile, dropped 0.7% in May, in line with expectations.

But, U.S. jobs growth rebounded in June from a weak May. The United States added a heartening 224,000 jobs last month, way higher than analysts’ expectations of 170,000, per the Labor Department.

Hiring last month was widespread, defying disputes between the United States and its trading partners as well as slowdown in global economic growth that affected American exports and dented businesses and consumer confidence. Professional and business services added 51,000 new jobs, while health care saw another 35,000 job addition. Transportation and warehousing added 24,000 jobs. Meanwhile, construction added 21,000 and manufacturing saw another 17,000 jobs added, way higher than its 2019 monthly average of 8,000.

Unemployment rate, by the way, edged up to 3.7% from 3.6% but is still near a 50-year low. The U-6 rate ticked up to 7.2%. However, the rate of underemployment rate is below where it was a few years back.

And this better-than-expected U.S. jobs data in June, by the way, compelled traders to scale back expectations of a sharp Fed rate cut anytime soon. After all, the strength in the labor force implies that there is no pressing requirement for the Fed to trim interest rates in the near term to support economic expansion. And with the economy showing signs of strength, the dollar has only one way to go, and that is northward.

What Does a Stronger Dollar Mean for Stocks?

A rising dollar impedes earnings growth, which suggests that returns from the equity market might be subdued. Particularly, companies that derive a lion’s share of their earnings from overseas will be dealt the biggest blow. Such companies are exposed to foreign exchange risks between the United States and other countries they are operating in. Thus, if dollar gains strength, it tends to dent foreign sales of such companies.

But, small-caps are set to benefit from wider domestic revenue exposure which insulates them from the effects of a stronger dollar. S&P Global (NYSE:SPGI) added that with every 1% rise in the greenback, large-cap companies with heavier U.S. concentration in terms of revenue generation have gained 71 basis points on average. But for small caps, the correlation was way better.

4 Winning Stocks

We have, thus, picked four stocks with high domestic exposure in terms of revenue generation and also flaunt a Zacks Rank #1 (Strong Buy). You can see Zacks Investment Research

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Written By: Zacks Investment Research