Weak Dollar Is No Silver Lining as Firms Face Tariffs

Just two months ago, U.S. consumer products giant Philip Morris (PM) told investors it had successfully wrestled with "substantial currency headwinds" from a surging U.S. dollar the prior quarter.

Since then, the currency's outlook changed drastically thanks to U.S. tariff policy, sending the dollar to three-year lows—down 11% from its January peak. A sinking U.S. dollar would normally boost multinational companies like Philip Morris by making its products cheaper in foreign markets, but investors can't necessarily count on that in this new global trading landscape.

The Trump administration's 10% tariffs on all overseas imports accompanied by much heavier 145% "reciprocal" tariffs on goods from China could reduce foreign demand for U.S. goods through tariff-driven higher prices or anti-U.S. sentiment. The same policy concerns pushed the dollar and U.S. Treasuries down recently, and dollar softness likely won't be enough to counter either headwind.

"The U.S. is seeing foreign investors move away from the dollar despite relatively high U.S. interest rates," said Kathy Jones, chief fixed income strategist at Schwab. "Most likely, this is driven by private investors rather than foreign central banks. Uncertainty and diminishing confidence about policies has resulted in foreign investors looking elsewhere."

In the past, periods of dollar weakness were often driven by U.S. recession or Federal Reserve policy. At those times, U.S. goods grew cheaper overseas, helping exports and sending dollars back into the coffers of firms like Philip Morris, Coca Cola (KO), Mondalez International (MDLZ), and Oracle (ORCL), four S&P 500 companies among the highest in terms of foreign sales as a percentage of all sales. Strength in U.S. exports can help entire sectors like staples, technology, and materials with heavy overseas exposure. And they can help individual companies' financial results.

For instance, in the first quarter of 2018, when the dollar was at its lowest level of the last decade, Philip Morris reported a year-over-year revenue increase of 13.8%, but it would have been just 8.3% without the effect of favorable currency. Also, excluding the currency impact, its earnings per share that quarter would have fallen from a year earlier rather than risen.

This time, it's not so clear the lower dollar can fuel an export-driven boost. Investors might learn more about tariffs' impact on overseas demand starting this week when Philip Morris, Lockheed Martin (LMT), Boeing (BA), Tesla (TSLA), and PepsiCo (PEP) report. It's likely too early for any of them to have felt much effect from the dollar's recent descent.

But they may be feeling the pressure from tariffs, as anger at Trump's policies threatens to hurt U.S. product demand. For instance, Lockheed's F-35 Lightning II stealth fighter is flown by 20 nations—some of which share in its manufacturing. But U.S. defense partners in Europe, angered by the tariffs, appear eager to invest in their own defense technology, Politico recently reported. They're investing more in European manufacturing to reduce reliance on U.S. parts and supplies for weapons. German defense stocks suddenly grew popular in investment circles.

Tariffs can also make life harder for companies like Boeing (BA) and other defense and aircraft manufacturers that would have to pay more for non-U.S. supplies and parts under the tariff regime. A weaker dollar might add pain by raising the cost of those products for U.S. companies. And last Tuesday, China said it told its airlines not to buy aircraft from Boeing or aircraft parts from the United States. Boeing and Lockheed both report this week.

For Tesla (TSLA), which reports tomorrow, a weaker dollar might be a day late and a dollar short, pardon the pun, as global anger at the company over CEO Elon Musk's role in the Trump administration sent first-quarter deliveries down sharply. Tesla competes heavily in China with domestic EV maker BYD, and many EVs in China sell for $25,000 or even as little as $15,000, Investor's Business Daily noted. The greenback's 11% descent from recent highs won't likely help Tesla's Model 3 compete in China, at least from a pricing standpoint. Its starting price is now well above $30,000 in China, according to CarNewsChina.com. Tesla isn't necessarily an outlier. Most U.S. companies heavily dependent on sales abroad could feel the tariff pressure, with China imposing 125% retaliatory tariffs on U.S. products last week.

"Any trade retaliation from U.S. trading partners would reduce U.S. exports, which would be a drag on growth," Fed Governor Christopher Waller said in a speech last Monday.

Dollar weakness related to tariff policy caused concern that overseas investors might not be simply shifting away from U.S. products but from the U.S. currency and Treasury market amid trade uncertainty. The U.S. dollar has enjoyed the status of "reserve currency" for decades around the world, so its descent troubled some observers. Former Treasury Secretary Janet Yellen told CNBC this week that the pattern suggests a "loss of confidence in U.S. economic policy" that's "really very worrisome."

While investors shouldn't ignore such concerns, recent leaks in U.S. plumbing don't necessarily mean dramatic economic changes.

"In terms of the dollar's role as a reserve currency, there is still no obvious substitute," Schwab's Jones said. "The large and liquid U.S. bond market is unmatched, and that provides support for the dollar's role."