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Dollar weakness will help sustain stocks’ rally

The weakness in the dollar is poised to help US multi-nationals with significant overseas operations, helping the stock market sustain a rally through the second half of 2017, according to analysts at Morgan Stanley.

Measured against a basket of the world’s other major currencies, the dollar has fallen 8 per cent so far this year to touch its lowest level since June 2016. After falling 1.4 per cent last week, the dollar index bounced modestly in New York to gain 0.2 per cent to 94.01.

The weakness in the dollar has already helped propel the S&P’s information technology sector up almost 23 per cent higher in 2017, marking the sector’s best start to a year since 2009.

Morgan Stanley notes that the tech sector has the highest international exposure, generating 57 per cent of its revenue from outside the US. That is followed by the materials sector with 47 per cent. The sector has advanced almost 11 per cent this year compared to just over 10 per cent for the broader S&P 500.

Some more niche sub-sectors have even higher exposures, such as semiconductors at 87 per cent, with the S&P 500 semiconductor equipment index up 44 per cent year-to-date.

As Wall Street launched into its biggest week for second-quarter earnings on Monday, the Morgan Stanley analysts noted that a weaker US currency could give a welcome boost to earnings in the second half of the year, helping ease scepticism over what some view as too lofty expectations for companies.

Average profit growth for S&P 500 companies for the second quarter is likely to fall below the first quarter’s 14 per cent level, as year-over-year comparisons become harder to beat. That headwind was likely to continue into the end of the year, making the dollar’s weakness a welcome counterbalance, according to the analysts.

“From our standpoint, this tail wind for 4Q sales and earnings could not come at a better time,” the analysts noted. “As the dollar has fallen through this year, this should be supportive of rolling forward EPS estimates.”

Overall, the S&P 500 dipped 0.1 per cent on Monday morning in New York to 2,469, the Dow Jones Industrial Average sank 0.2 per cent to 21,527 and the Nasdaq Composite moved 0.1 per cent higher to 6,391.

The financial sector was the only one to keep its head above water, rising 0.2 per cent, led by gains for regional banks such as Citizens Financial, up 2.5 per cent to $35.37, and KeyCorp, up 1.5 per cent to $18.30.

Goldman Sachs fell 0.6 per cent to $218.94, after UBS analysts lowered expectations for the company’s stock price on scepticism over the ability of the bank to boost trading revenue, after disappointing second-quarter earnings.