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Last week, the Dow Jones industrial average hit 13,000 for the first time ever, and the U.S. dollar fell to new record lows against the euro and the pound. The former milestone was greeted with much media fanfare and scores of headlines, while the latter garnered little attention at all.
But the two are closely connected — especially in the spring of 2007. An anemic dollar means a lot more than pricey cappuccinos and hotel rooms for American travelers to Europe this summer. It's also translating into powerful earnings for the very companies that make up the Dow — big blue chip multinationals who get a large chunk of their profits from overseas.
It's also why Wall Street has clocked nearly 40 record closing highs in the last six months, despite sobering news from the housing market and a big deceleration in the domestic economy. The wall of worry that Wall Street has been climbing is the same one the dollar has been descending.
Stocks like IBM tell the story. While Big Blue saw domestic sales rise a mere 1 percent last quarter, sales in Europe, Asia and the Middle East soared by more than 12 percent, translating into a 12 percent profit gain for the company.
In fact, the incredible shrinking dollar is packing a powerful two-pronged boost for the Dow. Not only do the Dow 30 companies now derive a record 48 percent of their sales from overseas, the rest of the world is growing far faster than the U.S. While the U.S. economy grew at a mere 1.3 percent in the first quarter, the rest of the world is expanding at many multiples of that numbers. In other words, it's a good time to be an exporter with a weak currency.
And the latest numbers bear that out: Of the 20 Dow stocks reporting earnings for the first three months of the year, 17 noted the positive currency effects of the weaker greenback. It's the key reason, S&P profits look to come in with gains of better than 7 percent — by no means blockbuster gains, but still more than twice that of initial expectations.
Of course all this means the U.S. stock market is more dependent on our foreign friends not just to buy our products with their euros, pounds and reals, but to buy our stocks as well. If the dollar becomes too "cheap" these very same foreigners could decide to park their money elsewhere, sending stocks into a swoon.
Wall Street loves a weak dollar, unless it becomes too weak, then it becomes a "dollar crisis."
Even with the once almighty greenback at new lows, we're not there yet. But don't forget the dollar the next time you are checking out the Dow.
Terry Keenan is anchor of Cashin’ In and is a FOX News Channel business correspondent. Tune in to Cashin' In on Saturdays at 11:30am and find out what you need to know to make your money grow and keep what you already have!