The U.S. dollar (DX=F, DX-Y.NYB) is surging into the new year, with its rapid gains likely to test corporate earnings first reported by major banks and retailers.

“A stronger U.S. dollar could exacerbate a recurring earnings season phenomenon—increased dispersion in earnings per share (EPS) revisions,” Morgan Stanley analyst Mike Wilson wrote in a note to clients on Monday. big."

In other words, a strong U.S. dollar will adversely affect companies that do much of their business overseas, such as consumer goods and household products, because it will lead to slower earnings growth over time due to unfavorable foreign currency exchange.

"This typically drives broader performance results across the index during reporting season and creates a strong stock-picking environment," Wilson added. "We're seeing results like this come up this earnings season while earnings per share improve on the index. The level will be in the mid-single digits.”

S&P 500 companies with international operations drove the bulk of third-quarter earnings growth, according to FactSet, a troubling sign that any weakness on the currency front could impact overall stock market performance.

Much of the greenback's positive price action has been driven by two major catalysts: Trump's election and subsequent Republican sweep, and the recalibration of future Fed easing in the face of strong economic data.

The U.S. dollar index, which measures the U.S. dollar against a basket of six foreign currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc, has risen 10% after hitting September lows. The index has risen more than 6% since the election.

Given these moves, "our analysis suggests we should see an increase in mentions of currency impacts this earnings season," Wilson said.

Trump's proposed policies, including high tariffs on imported goods, tax cuts for businesses, and restrictions on immigration, have led to more bullish gains for the dollar, largely due to their protectionist nature.

Most economists agree that most of these policies, especially Trump's tariff plan, will lead to higher inflation over time and force the Federal Reserve to keep interest rates higher for longer, which is bullish around the U.S. dollar The cycle of emotions remains intact.

Goldman Sachs research said: "Looking forward, the key question is the extent to which these moves (dollar index) will be verified by new data and whether they have incorporated our expectations for policy shifts in the coming year, especially higher tariffs." the team led by analyst Kamakshya Trivedi wrote in a separate note on Friday.

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