The rebound in the US dollar may be the last thing that equity investors want to see after a torrid summer on Wall Street.

For much of the past year, a weak dollar has been seen by investors as a tailwind for US stocks, that has at various times helped boost quarterly earnings for a string of global companies such as McDonald’s, Johnson & Johnson, Coca-Cola and Pepsi.

Yet amid no end to the eurozone debt crisis, the dollar has risen sharply and is near a seven-month high on a trade-weighted basis. With some currency analysts forecasting further weakness in the euro, even towards $1.20 from its present level of $1.3640, earnings expectations for the S&P 500 could erode further, pressuring the world’s biggest equity benchmark.

“The rally in the dollar is a two-edged sword,” says Bruce Bittles, chief market strategist at Baird, a wealth manager. “The relative strength in the dollar is attracting assets from abroad but it could cause our export markets to suffer and change the equation for global companies when profits are translated back into dollars.”

In recent years, the weak dollar has helped many US exporters by making their products more affordable abroad. For example, John Deere, the world’s biggest tractor maker, is one company for which the value of the dollar often makes a big difference to its bottom line, as it brings home profits earned overseas.

Ahead of the third-quarter reporting season next month, analysts have dialled down their forecast earnings per share growth for the S&P 500 to 13.5 per cent from 16.4 per cent at the start of July, according to FactSet.

But a stronger dollar would not harm all sectors. In general, periods of dollar weakness have rewarded industrials and materials sectors with some energy and technology names also performing well, according to Citi. A weak dollar also tends to boost technology hardware and equipment. Yet according to Citi, a stronger dollar favours tech software and services and also boosts healthcare stocks.

“The dollar has some impact, but it is not the end all,” says Tobias Levkovich, chief US equity strategist at Citi, who estimates that 30 per cent of S&P 500 sales are derived from outside the US, with 20 per cent coming from Europe.

He adds that there are some benefits of a stronger dollar resulting “in lower commodity prices [that] would help the economy and broader stock market”.

Others are also relatively unconcerned by a strengthening dollar.

“The dollar has definitely been a benefit for a lot of our companies but right now we’re not too worried about it,” says Eric Schoenstein, principal at Jensen Investment Management, with $5bn in assets under management.

Though Jensen’s primarily large-cap portfolio has more than 50 per cent of its holdings’ revenues generated outside the US, Mr Schoenstein says: “Big companies know how to manage their exposure and have been in emerging markets for years.”

He also notes that companies’ diverse exposures will mean that divergences between Asian and Latin American currencies against the dollar may offset each other.

Other big US manufacturers have deliberately shaped their companies to limit the impact of currency moves. Faced with rapid growth in emerging markets, big US industrial multinationals have established operations globally in recent years to reduce the risk posed by foreign exchange fluctuations and win local political and consumer support for their products.

Some companies avoid currency risk by doing all their business in US dollars. For example, Boeing, the aircraft-maker and the US’s biggest exporter, sells internationally in a market that is wholly dollar-denominated.

Even so, many view a stronger dollar as a clear negative for US equities, which so far this year have held up better than many other share markets.

Michael Kastner, principal at Halyard Asset Management, says: “The dollar is something to watch and it will have an impact, no doubt about it.”

Adam Parker, US equity strategist at Morgan Stanley, adds: “One source of the strong profitability of US companies so far this year was the earlier dollar weakness. That tailwind is likely to be diminished or even turn into a headwind for some companies, depending on the lag factor.”

With fears of a slowdown in global growth mounting, investors in US equities will be hoping that any headwind from a stronger dollar will be minimal.

Additional reporting by Alan Rappeport

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