Bartiromo: Implications of the big, bad buck

Few market indicators reflect the power of the U.S. economy and stock market as much as a strong dollar. And the deep liquidity and strength of the U.S. economy is clear in how the dollar has traded this year.

"A stronger dollar is likely to be both an economic and market positive," says Liz Ann Sonders, chief investment strategist at Charles Schwab.

The better-than-expected jobs numbers Friday intensified what has been the hottest streak for the dollar in the 41 years since the dollar index has been tracked. The currency is up for 12 straight weeks, trading at multi-year highs against the euro and the Japanese yen as turmoil around the world sends more assets into the "safe haven" of the big bad buck.

"It means we have the best horse in the glue factory," says Congressman Paul Ryan, (R-Wis.).

Stronger U.S. growth and higher interest rates make the U.S. a more attractive place for investment and triggers even more buying of dollars. So the U.S. might not be firing on all cylinders yet, but relative to the rest of the world, it is leading.

To be sure, the once hot BRIC nations — Brazil, Russia, India and China — long perceived to be the growth engines of the world, have slowed considerably from the highs of 10 years ago. Meanwhile the slow, yet consistent stability of the U.S. economy has attracted foreign investors in a world of geopolitical worry.

The U.S. is far stronger than other economies globally, U.S. Treasury debt yields are relatively attractive vs. Germany and Japan, and there is no shortage of negative headlines from global hot spots in places such as the Mideast and Russia. "So the flight to quality makes sense," says Mark Lehman, president of advisory and investment firm JMP Securities.

The European economy continues to struggle as well, with many investors disappointed that the European Central Bank did not offer any new stimulus last week at their regularly scheduled meeting. Even Japan, which was among the best-performing stock markets of 2013, has had a tough time this year as a debate rages as to just how strong its economy and recovery really are, in the face of a weak Japanese yen.

But the perceived safe haven status of the dollar has also stoked worry about deflation and whether the U.S. is simply getting too expensive to stay competitive with the rest of the world. The strong currency is a surefire sign that international investors have faith in the slow U.S. economy. But when is the strong dollar too strong?

The strong dollar causes deflation, and a broad index of commodity prices is off 7% from its recent highs, notes Larry McDonald, head of Macro Strategy at Newedge SocGen. As the dollar appreciates, commodities become more expensive for overseas buyers who have to convert their currencies into dollars. A strong dollar makes U.S. exports much more expensive and, as a result, McDonald says, will create a drag on U.S. GDP of 0.375% during the next 12 months.

Third-quarter earnings will begin to flow out in the next few weeks and analysts overall expect Standard & Poor's 500 earnings to show double-digit growth for the quarter, according to S&P Capital IQ. Yet some analysts are questioning whether large multinationals will miss profit expectations and blame it on the dollar because their products are looking much more expensive than their international counterparts'.

"In the short term, there is some risk that third-quarter corporate earnings could be dented by the dollar's recent surge, at least multi-nationals," says Schwab's Sonders.

This is one reason The Federal Reserve is also watching the moves. At the last Fed meeting, Philadelphia Fed president Charles Plosser told colleagues, "The Fed must monitor the dollars effect on U.S. exports and the GDP."

There are certainly benefits to a strong dollar, including lower import prices for things like oil and auto's, as well as cheaper travel for Americans overseas. But that might not be enough as we approach year end and the pressure is on companies to deliver strong profits to justify a red hot stock market.

Baritomo is anchor and global markets editor of the Fox Business Network. Follow her at @mariabartiromo and @sundayfutures.