Business World

NEW YORK — With the dollar surging more than 20 percent over the past year and seemingly on track for further gains, year-on-year earnings comparisons for the first quarter are getting bleaker, a potential blow for the nascent rally seen in U.S. stocks last week.

The dollar index, which measures the greenback against a basket of six major currencies, has gained more than 22 percent since March 2008, and it’s up more than 7 percent since the start of this year.

"The dollar has done quite well, and that makes earnings comparisons difficult for multinationals in the U.S.," said Ken Tower, market strategist at Quantitative Analysis Service.

Companies that make sales overseas in other currencies lose out when they have to translate those into a stronger dollar in quarterly reports.

At least 45 percent, and perhaps more, of the sales of S&P 500-component companies come from overseas. Only two-thirds of companies disclose where their sales come from, according to Standard & Poor’s.

"That translates into a low single-digit percentage headwind to sales," said Alec Young, market strategist at S&P.

For U.S. firms’ earnings, the problem isn’t only that sales are weaker when they get translated, it’s also that U.S.-made products have become more expensive, and therefore less competitive on markets around the world, just as overall sales have shrunk amid the global recession.

"The stronger dollar and its negative impact on the export business are pretty painful when the global economy is already so weak and companies are looking for any strength they can find," said Don Straszheim, president of Straszheim Global Advisors.

The problem didn’t seem to be of an immediate concern to investors, though online payday loans. Investors seem content to bet that, for now, much of the bad news has been priced in, making way for a big rally last week.

Last week, the Dow Jones industrial average rose a whopping 9 percent The S&P 500 Index gained 10.7 percent on the week, while the Nasdaq Composite jumped 10.6 percent.

But analysts say the dollar’s performance may start to weigh on multinationals’ earnings, thus hurting the U.S. stock market.

On the Dow, seven stocks whose prices hover well above others now call the shots in terms of influencing the blue-chip average: IBM, Chevron Corp., Exxon Mobil Corp., McDonald’s Corp., Wal-Mart, Coca-Cola and Procter & Gamble.

Unfortunately, all of these firms drive a substantial amount, if not most, of their sales, from overseas. When it posted earnings last month, Wal-Mart warned currency translations could hurt profit to the tune of 13 cents a share. Further gains in the dollar could make things worse.

Besides their still uncertain impact on the coming quarters, currency rates will play an increasingly important role over the next few years as the global economy tries to recover from the recession, says Straszheim.

"We’re already hearing many U.S. multinationals saying the stronger dollar is hurting their earnings from abroad," he said. "This is going to be a big (political) issue for the next couple of years.

"With the global recession that we’re in, there’s a great risk for every country in the world to try to export their problems and gain market share through currency."

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