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3 reasons why the U.S. dollar is strengthening: Credit strategist

Moody’s Investors Service Managing Director Atsi Sheth joins Yahoo Finance Live to discuss the strengthening of the U.S. dollar, market uncertainty, rate hikes, and the outlook for the economy.

Video Transcript

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JULIE HYMAN: We've also been watching currencies very closely. Of course, the US dollar has been seeing strength compared to other currencies this year, although we're seeing a little bit of a reversal today. We've seen a weaker yen, a policy-hammered pound contributing to ripples in Forex overall. And the markets are now watching for how a downward shift in US equity is set to hit currencies, amidst all of this Fed speak.

Joining us with more is Atsi Sheth, who is Moody's Investors Service Managing Director. Atsi, good to see you. So we have been watching, obviously, a lot of turmoil occurring in the currency market. What should investors be bracing for now? It doesn't feel like necessarily that strengthening of the US dollar is over.

ATSI SHETH: No, I wouldn't say it is. And you know, the reason the dollar is strengthening, you know, comes from multiple sources. The first is any time you have uncertainty, and geopolitical risks, and macroeconomic uncertainty around the world, the dollar benefits a safe-haven status so that's one. The second is the Fed's been much more aggressive in hiking rates than its peer banks, whether it's the ECB or the Bank of Japan. So that's, again, strengthening the dollar.

And then third, of course, I mean, you referenced the pound, where there's sort of idiosyncratic reasons for that particular currency to be very volatile in the last couple of days. So very, very many different reasons. And like you said, dollar strength is here for a while, as long as that interest rate differential remains, as long as uncertainty remains.

BRAD SMITH: And so what is the reality of the continued impact of some of the kind of foreign exchange calculus that is taking place? And the kind of longer-term implications of that?

ATSI SHETH: Sure, you know, so if you think about an investor, and you sort of separate the pound, where, again, the government-- the British government borrows in sterling. So the pound going up and down doesn't really affect-- the exchange rate doesn't affect the borrowing costs, the yields might affect the borrowing costs but the exchange rates don't.

Whereas, if you think about emerging markets around the world, there, wherever they borrow in US dollars, this sort of exchange rate turmoil can really increase borrowing costs for the governments, for the corporates in those emerging markets so that's one thing from an investment perspective. The currency turmoil translates into debt repayment costs, immediately. And that benefacts, actually, the refinancing risk for those entities.

BRIAN SOZZI: Atsi, one thing I was reminded about rereading the annual report for Nike-- they, of course, report earnings later in the week-- is big companies like Nike, they hedge against foreign currency risk. How should big companies be employing hedges in this environment because ultimately, that may impact their profits and then by extension, may impact their stock price?

ATSI SHETH: Yeah, and it's particularly true. I mean, I think the data is now that about 30% of the largest US companies earn, you know, their revenues from outside the US. And so any time the dollar strengthens as much as it has now, your revenues are going to be affected, just because of the exchange rate. And I think, you know, most companies that have that exposure are aware of this. And that hedging is likely to be in place, if it isn't already will be definitely in place.

I think most companies are aware of it. It is those companies that, at the margin, you know, even if you have 10% exposure and you don't think you need a hedge because, you know, you're not expecting as much volatility, that's where the impact when your currency is strengthening, you know, by 5%, 10% against others, you feel impact, even if you're at 10% revenues from outside.

JULIE HYMAN: So Atsi, to put it all together, at a time when we are seeing global growth slowing, we are also seeing dollar strengthening, other currencies weakening, which has disadvantages for both sides. We're seeing credit costs climbing. I mean, it just seems like it's sort of pain piling on pain at a time of economic vulnerability.

ATSI SHETH: Yes, it is. And you know, if there is one silver lining to your currency depreciating, it is that it makes your exports more attractive. And you know, and that should help your growth as well.

But your currency depreciating at a time when growth is-- [CLEARS THROAT] excuse me-- going down, means that the sort of the export momentum is low anyway. So even that silver lining is slightly burnished, I would say.

You know, in a time of currency depreciation, those companies and countries that have deep domestic capital markets tend to benefit because it means you can borrow in your own currency, and you can finance yourself or refinance your debt at a time that your currency is depreciating. But yes, overall, a sobering and sort of slightly negative picture for the next couple of quarters.

JULIE HYMAN: I like your quest for silver linings, though. I appreciate that always. Atsi, thank you so much for being here. Atsi Sheth, Moody's Investors Service Managing Director, appreciate it.