By Chelsey Dulaney, Ben Eisen and Ira Iosebashvili

The dollar's sudden rise is reigniting fears that a strong currency could complicate the prospects for an economic rebound, slowing U.S. growth and profits while intensifying capital flight from the developing world.

The ICE U.S. Dollar Index, which measures the U.S. currency against six others, reached its highest level in more than 13 years Thursday. It is up 3% since the presidential election, a period in which the dollar has reversed its recent losses against the euro, yen and Swiss franc.

The gains are even greater against many emerging-market currencies. The Mexican peso has fallen 10% against the dollar to record lows since the election, while the Brazilian real has tumbled 7.3%.

U.S. consumers may welcome a mighty dollar, which makes foreign goods and travel abroad cheaper. But a strengthening currency poses problems, too.

An early victim could be the tepid recovery in U.S. corporate profits. Earnings for S&P 500 companies grew by a modest 3% for the third quarter after declining for five straight quarters, according to FactSet data, though 6% of companies have yet to report earnings for that period. Analysts expect further gains of 3.4% for the current quarter, down slightly from 3.7% growth projected the day before the election, FactSet data show.

Beverage maker Coca-Cola Co. forecasts that currency swings will cut as much as 9% from its pretax profit this year. Apple Inc. said in an earnings call last month that it expects the dollar's strength to shave $650 million from its revenue in the current quarter.

In an earnings call Wednesday, Cisco Systems Inc. said it has seen weakened demand from customers abroad, in part because of "incredible currency headwinds." Chief Executive Chuck Robbins said some of Cisco's customers have delayed capital spending "until they had better clarity around the currency situation."

Federal Reserve Chairwoman Janet Yellen reminded the Joint Economic Committee of Congress on Thursday that the stronger U.S. currency was already weighing on some U.S. industrial companies.

"Manufacturing output continues to be restrained by the weakness in economic growth abroad and by the appreciation in the U.S. dollar over the past two years," she said.

Investors already are betting on companies that generate most of their revenue in the U.S. and are less exposed to currency fluctuations. Shares in S&P 500 companies with more than 90% of their revenue from inside the U.S., such as Kohl's Corp., climbed 3.4% since the election through Wednesday. Shares in companies that generate the majority oftheir revenue outside the U.S., like International Business Machines Corp., have edged up just 1.9%, according to Bespoke Investment Group.

The dollar is gaining as investors bet that fiscal spending and tax cuts proposed by President-elect Donald Trump will spur U.S. economic growth. It could be a self-defeating rally, though.

A Goldman Sachs Group Inc. gauge of how restrictive U.S. financial conditions are to growth has risen to its highest level since March this week, indicating tightening financial conditions. The index, which takes into account factors like credit spreads and the level of the dollar, was up to 100.1117 on Wednesday from 99.8766 on Nov. 8, with the dollar's strength contributing to 84% of its rise since the election.

A stronger dollar tightens financial conditions because it makes it more costly for those outside the U.S. to borrow dollars. It also gives companies less money to spend by restraining profits.Sharp gains in the U.S. currency can unsettle markets abroad. Prices for raw materials, a main export for many developing countries, can come under pressure because they are denominated in dollars and become more expensive for foreign buyers. Commodities like oil, gold and coal have traded lower in recent days under pressure from the strengthening dollar, analysts say.

Dollar-denominated debt has become more expensive to pay back at a time when these countries are bingeing on it. Emerging-market debt issuance in dollars in 2016 is the largest on record, at $409 billion, eclipsing the previous high of $403 billion set two years ago, according to Dealogic.

"The strong dollar is destabilizing for markets, for foreign assets, for emerging-market nations that pay back their debt in dollars, " said Jonathan Lewis, chief investment officer at Fiera Capital Inc. "That's pretty significant."

Central banks have acted to slow declines in their currencies since the election. The Bank of Mexico on Thursday raised interest rates to support the battered peso, while traders say central banks in Indonesia, South Korea and Malaysia also stepped in since the election to support their falling currencies.

There is precedent: The dollar's 8% rise during the first seven months of 2015 helped precipitate panicked selloffs across global markets that August.

Many investors are already dumping developing-country assets. Nearly $10 billion in foreign investment has flowed out of emerging-market stocks and bonds since the election, Institute of International Finance data show.

China's yuan fell to eight-year lows this week, stoking fears that the yuan's weakness might pressure other developing countries to competitively devalue their own currencies.

"The yuan is going down much faster than people had expected," said Mr. Lewis of Fiera Capital. "That typically has not been positive for other Asian currencies and other markets."

Write to Chelsey Dulaney at Chelsey.Dulaney@wsj.com, Ben Eisen at ben.eisen@wsj.com and Ira Iosebashvili at ira.iosebashvili@wsj.com

(END) Dow Jones Newswires

November 18, 2016 08:14 ET (13:14 GMT)

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