Each quarter’s earnings season seems to have its own theme. During the first quarter of 2015, the recurring topic was the value of the U.S. dollar relative to foreign currencies. Foreign currency values matter primarily for companies selling goods and services in local currencies around the world, and reporting profits and losses in their home currencies. When foreign currencies weaken vs. the dollar, for example, U.S. based companies report lower dollar profits. That dynamic is important now because the dollar has been very strong lately, and reported earnings look weak, superficially.

The exchange value of a currency is a function of its countries’ short-term, real (adjusted for inflation) interest rates and the soundness of its monetary policies. Although critics of the various forms of the Fed’s money-printing policy (quantitative easing, or “QE”) have warned about the fallout from a weaker dollar, the opposite has actually come to pass: the dollar is very, very strong right now.  The greenback is notably stronger vs. both the yen and the euro because of more recent QE programs in Japan and the EU, respectively.

QE is not the whole story, though, because the dollar has also strengthened vs. other currencies whose countries have engaged in less or no QE, like Canada, Switzerland, and, to a certain extent, Great Britain. In those cases, the dollar’s ascent reflects the prospect of rising real interest rates in the U.S. The market for dollars is predictive in the same way the market for stocks reflects future economic prospects. We – along with every other research-oriented money manager – have been watching for six years to see when the Fed might raise interest rates. Until fairly recently, two main catalysts for a raise in rates (low unemployment, and a naturally expanding money supply) have been absent. Now with unemployment comfortably under 6% and the money supply (M2) expanding at an average of 6% year over year, the rationale for keeping interest rates low is ebbing quickly. The dollar’s recent strength reflects that good things are now, and will continue to be, happening in the U.S. economy in the months and quarters ahead.

While U.S. dollar strength has a negative impact on near-term profits, it also creates an opportunity for shrewd managers with international operations: investing U.S. dollars in foreign capital projects becomes cheaper, likewise acquiring foreign companies. As other currencies catch up to the dollar, prior investments made at bargain prices will begin to pay off in the form of future dollar-denominated profits.