Dollar's Decline Is a Rare Nasdaq Tailwind as Earnings Loom

While tech investors have plenty of issues to worry about as the sector heads into a key week for corporate earnings, one notable headwind from last year has eased in recent months: the dollar.

The dollar has weakened by about 11% against a basket of major currencies from a two-decade peak reached in September, touching its lowest since April. The trend will bolster earnings at companies that derive a greater percentage of their revenue from outside the US, as a weaker greenback means foreign revenue translates into more dollars.

The index was little changed on Monday, while the Nasdaq 100 Index fell 0.9%.

“Currency translations were a big headwind last year, but this fulcrum in the dollar will support earnings and growth,” said Rob Haworth, senior investment strategist at U.S. Bank Wealth Management. “As companies look out over the year, they can start to see benefits from where the currency is headed.”

The dollar index had its biggest gain last year since 2015, a byproduct of the Federal Reserve pushing up interest rates in order to combat inflation. The reversal reflects optimism that the central bank could be near a dovish pivot; the yield on the 10-year Treasury, a key factor behind tech valuations, has similarly receded from a recent peak.

The tech-heavy Nasdaq 100 Index is up 6.9% since the dollar index’s peak in September, and it is has risen for four straight weeks to kick off 2023.

The weaker dollar has already been a theme this earnings season. IBM Chief Financial Officer James Kavanaugh told Bloomberg News that the currency will stop weighing on growth this year, with weakness bolstering results in the second half. This was echoed by ServiceNow Inc., which said currency fluctuations probably won’t weigh on annual earnings in aggregate this year, following a year when they curtailed growth by 4.5 percentage points.