Copenhagen Stock Exchange: Focus: Continued Weakening Of The US Dollar May Change The Prospect Of Further Rises In Share Prices

After a few lean years, the equity markets have seen major increases in 2003, which are primarily due to the growth boom that the USA has experienced over the summer. And there are still a number of convincing arguments that investors may see more upward movements in share prices the coming months. But there is a snake in the grass - failure to create jobs and the weakening of the US dollar - and thus the risk of a genuine USD crash - may threaten the positive atmosphere on the equity markets.

In Focus no. 72 Bjørn Schwarz, Sydbank Markets, looks at what the weakening of the US dollar means to the USA and the European companies.

The fear of a genuine US dollar crash is primarily based on two factors, partly the gigantic US balance of payments deficit, partly the fact that the US dollar, in spite of the weakening of the last two years, is only marginally undervalued against the euro, among others.

The fact that the euro and the yen have had to bear the largest part of the burden in connection with the US dollar weakening is primarily due to the fact that many Asian countries have locked their currencies to the US dollar. However, the weakening of the US dollar is unlikely to continue as we will probably soon see both European and Japanese politicians step in with verbal intervention and try to "talk up" the currency.

The weakening of the US dollar weighs on the European and thus also the Danish companies, and the impact of the currency effects on the companies' growth and earnings outlook for 2004 will be in focus. If today's expectations are based on a higher US dollar rate, this will increase the risk of a downward adjustment of expectations. Certain companies are very sensitive to a further weakening of the US dollar, and to some industries such as the wind turbine sector a weaker dollar will mean not just a fall in earnings, but also that projects in the USA will be in danger of being deferred or discontinued. Other companies that buy components or fuel in US dollars may, on the other hand, profit from a weaker dollar.

Even though the short-term growth prospects look positive on both sides of the Atlantic, and, viewed separately, point towards rising share prices, a continued weakening of the US dollar may make the investors focus more on the imbalances of the US economy, the sustainability of the upswing and the earnings pressure that a number of European companies are going to announce in the coming months, and this will once again be a burden on the share prices.

Read the article "Continued weakening of the US dollar may change the prospect of further rises in share prices" in Focus no. 72.