Stronger U.S. Dollar Could Cut 2006 Profits

On a trade-weighted basis the U.S. dollar is up 3% so far this year, a sharp contrast to the consensus forecast of 10% decline in 2005, notes Merrill Lynch & Co. "In fact, if the dollar stays where it is right now, there is a possibility of an outright decline in profits next year," says the New York-based financial firm.

Its economists calculate that if the dollar holds onto this year's appreciation, the consensus forecast on earnings-per-share for the S&P 500 for 2005 would decline to $72.80 from $74.50 this year and to $75 from $82 for 2006. Even Merrill's EPS forecast, which has been lower than the consensus because it factors in less of a dollar decline, would be cut -- to $71.50 from $72.20 this year and to $71 from $76.25 in 2006.

When the U.S. dollar rises, tech hardware, forest products, steel and mining stocks are among those that most underperform, adds Merrill.

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