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 1. Home
 2. Cash & Liquidity Management
 3. Global Cash & Liquidity Management


STRONG DOLLAR WIPES BILLIONS OF CORPORATE AMERICA’S EARNINGS

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27th Jul 2022 by Pushpendra Mehta, Executive Writer, CTMfile


Pushpendra Mehta, Executive Writer, CTMfile

Corporations are facing myriad challenges – supply chain snarls, the lingering
effects of the pandemic, the Russia-Ukraine war, the global energy crisis,
China’s economic slowdown, inflation, interest rate hikes, and now another
growing threat – a strong US dollar.

This meteoric ascent of the dollar is taking a bite out of corporate earnings,
particularly for US corporations doing business abroad or getting most of their
profits from overseas.

The US Dollar Index used to measure the value of the dollar against a basket of
six foreign currencies (the euro, Swiss franc, Japanese yen, Canadian dollar,
British pound, and Swedish krona) is up about 16% this year. According to Morgan
Stanley, that could translate into a fall of about 8% in earnings per share of
S&P 500 companies.

The dollar is expected to continue its dream run and remain strong for at least
the next three months, possibly to the end of the year, or at least until the US
Federal Reserve (Fed) tempers its interest rate increases.


HOW MUCH HAS THE DOLLAR RISEN AGAINST OTHER CURRENCIES?

The US dollar has gained against almost every other currency in recent months.
It’s up 11% versus the euro so far this year, with the exchange rate between the
two currencies hitting parity for the first time in 20 years. The USD is also up
13% against the British pound, 20% against the Japanese yen, and 6% against the
Chinese renminbi, according to a recent article in Fortune.


CAUSES OF THE SOARING DOLLAR

The rising value of the dollar is the result of multiple causes: First, the
decision by the Fed to begin aggressively raising interest rates in an attempt
to rein in inflation and curb borrowing. Second, the geopolitical uncertainty
created by the Russian-Ukraine conflict has resulted in global investors seeking
safety in US currency and assets, as the US is seen as a source of economic
growth and stability. And third, the US is more energy independent than European
countries that import more of their oil and gas from abroad.

In times of economic and political turmoil, investors tend to come into dollars,
considered the primary safe-haven currency. For investing in US stocks and
bonds, traders usually use dollars, which results in driving up the dollar.


US CORPORATIONS THAT HAVE BEEN NEGATIVELY IMPACTED BY THE SURGING DOLLAR

An analysis from Bloomberg found that references to “foreign exchange” in
earnings calls have hit a three-year high this season.

A strong dollar is weighing on earnings of US companies with large international
operations. These American companies derive revenues from overseas and are
suffering from the dollar’s strength when they convert foreign sales back into
dollars.

Coca Cola, Pepsi, Yum Brands, Procter & Gamble, AbbVie, Pfizer, Johnson &
Johnson and Philip Morris have been impacted by the surging dollar that will
exert a drag on their profits and lower revenue forecasts. Technology titans
such as IBM, Salesforce, Apple, Meta Platforms, Alphabet and Netflix could be
particularly hard hit since they generate the biggest portion of their sales
outside of the US.

Last week, IBM warned that the strengthening dollar could reduce its revenues
this year by $3.5 billion, including about $900 million in the second quarter.
Microsoft also trimmed its sales forecasts based on the rising and valuable
dollar. Salesforce lowered its revenue guidance due to the surge in the dollar
and expects to have a $600 million negative impact on revenues this year. 

Netflix blamed the dollar’s historic run-up against most other currencies for
putting a serious dent in its revenue growth as it took a $339 million sales hit
in Q2 (April-June) 2022. The outlook for the third quarter is even worse because
Netflix says 60% of its revenue comes from international markets, but nearly all
of its expenses are in dollars.

The S&P 500 Foreign Revenue Exposure Index has dropped around 17% so far this
year, compared with the broad S&P 500 index’s 13% decline. Meanwhile, the S&P
500 U.S. Revenue Exposure Index, which includes companies more dependent on
domestic sales, has lost just 7%.


EFFECTS OF THE DOLLAR’S HISTORIC SURGE ON US MULTINATIONALS

A strong dollar is a windfall for US consumers, particularly for US tourists
traveling abroad who will find that their money goes further than it used to.
Imports or goods imported from countries whose currencies have dropped against
the dollar have become cheaper. But for American companies that have big
international footprints or sell products or services abroad, it is taking a
toll.

The strengthening of the dollar makes American manufactured products or exports
more expensive overseas, which means foreign buyers need to pay more in local
currency to purchase those goods. This deflates or lowers the value of
international revenue generated by American multinational companies once it is
converted into US dollars.

The rising cost of US products can lead to a decline in demand and make American
manufacturers less competitive, as overseas importers or foreign buyers look to
alternative markets to source goods. These factors can hurt corporate America’s
bottom line, especially businesses with global operations, as an 8–10% increase
in the value of the dollar can lead to a 1% drop in US corporate profits,
according to Credit Suisse.

Disadvantaged US manufacturers may feel pressured to look for ways to cut costs
to keep their prices competitive and maintain their margins. Furthermore, when
exports become more expensive, it could mean expanding imports and declining
exports add to the growing US trade deficit, leaving US policymakers with a
conundrum – do they choose inflation or more trade deficit?

If US multinational companies are concerned, then many foreign companies doing
business in the US are benefitting from the mighty dollar, as their products are
now cheaper to import into the country. Also, a rising dollar “inflates the
value of U.S.-generated revenue on a foreign company's balance sheet once it's
converted to a local currency,” as per a recent article published in Fortune.

According to Fortune, on July 15, British luxury retailer
“Burberry forecast that the strong dollar would boost its overall fiscal
performance, increasing its full-year sales by almost $200 million. That
cushioning is welcome news for Burberry; its sales in China—the source of a
third of its sales—sunk by 35% this quarter due to the country's COVID
lockdowns.”


US COMPANIES REVIEWING HEDGING STRATEGIES

In light of the strong dollar, US companies are reviewing their hedging
strategies. They now have more tools at their disposal to hedge foreign currency
swings and risks and provide them visibility into what future overseas revenue
may look like.

The Wall Street Journal reported in late June that “Beverage maker Coca-Cola saw
a roughly $200 million negative impact on its first-quarter operating income,
which came in at $3.4 billion, up 25% compared with the prior-year period. The
company has about $7.6 billion in notional foreign-exchange cash-flow hedges in
place.”

Corporate treasurers have been actively building foreign exchange hedge
positions via forwards and options contracts, “as well as instruments like
knock-ins and knock-outs, which allow companies to seek the protection of a
hedge only at certain exchange rates,” the same article detailed in the Wall
Street Journal.


CONCLUSION

Most analysts on Wall Street believe that the dollar will continue to trade
higher against major currencies. However, if the US moves into a recession, and
the Fed begins to loosen monetary policy, and if Europe’s recent efforts to
revive its economy work, it could sap strength from the US dollar and bring it
down, easing the travails for US corporations dependent on overseas sales.

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ABOUT THE AUTHOR




Pushpendra Mehta
Executive Writer, CTMfile

Pushpendra Mehta is Executive Writer at CTMfile responsible for creating content
that pertains to the world of cash and treasury management, finance and
economics sector. He has served as a writer and marketer for varied businesses,
including online news media and digital publishing, global economic research and
forecasting, and bankcards and consumer finance consulting. Pushpendra has
worked with teams spanning North America, Western Europe, the U.K., Asia
Pacific, and Latin America. He is the author of four books, and is an alumnus of
Northwestern University, IL.


ALSO SEE


US DOLLAR RIDES HIGH DESPITE INFLATION SPIKE – INDUSTRY ROUNDUP: 10 MAY

10th May 2022


GLOBAL ENERGY CRISIS MAY WORSEN IN THE COMING MONTHS, IEA CHIEF SAYS

20th Jul 2022


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