U.S. Corporations Hurt by Currency Fluctuations

U.S. corporations are beginning to complain about the damage that the strong dollar is having on corporate earnings. This morning, United Technologies announced plans to lay off 11,600 workers as a rising dollar and deteriorating economic conditions forces the company to reduce costs. Yesterday, McDonald’s warned that the strength of the dollar and respective weakness in other currencies could decrease first quarter revenue by at least $600 million and earnings by 7 to 9 cents a share. Last week, Burger King Corp and Estee Lauder also announced that their profits dropped as international sales translated into fewer dollars.

A strong dollar is both good and bad, but the bad outweighs on the good especially in the current day and age when U.S. corporations are doing a lot of business abroad.

The impact of currencies on earnings is something we have discussed often on this blog. Imagine that McDonald’s sells Big Macs in the U.K. for 2 British pounds at a GBP/USD exchange rate of 1.80. For U.S. based McDonald’s, that would mean revenue of $3.60 per Big Mac. Suppose that the British pound weakens 20 percent, bringing the GBP/USD exchange rate down to 1.44. The 2 British pounds that they charge for each Big Mac now equals revenue of only $2.88 instead of $3.60. Compound this by millions of Big Macs sold abroad and you understand how a strong dollar hurts companies like McDonald’s.

U.S. Needs a Weak Currency

What the U.S. economy really needs is a weak currency because it will keep demand domestic and help increase the profitability of U.S. corporations doing business abroad. Unfortunately until fear and uncertainty about the financial sector subsides that may not happen anytime soon. In the interim, it is important to realize that the recent strength of the U.S. dollar will contribute to the difficulties plaguing U.S. corporations and because of that, first quarter earnings could take a bigger hit than most investors would expect.

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5 Comments

  1. The world is now in the grip of the “Great Recession” and economic growth could dip below zero in 2009, the head of the International Monetary Fund (IMF) warned yesterday, as stock markets hit their lowest levels in decades.

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  2. On the other hand, a strong dollar is a boon for companies exporting to the US. They get more bang for their dollar. As you say, it goes both ways. I would definitely support a strong dollar as it would benefit both parties in the long run.

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  3. It was much less than twelve months ago, that certain large holders of USDollars were needling Hank and Ben over their serious concerns of the evaporation of USD strength on their holdings. Even one of the mouthpieces for the FED and US Treasury in the free markets, Bill Gross, appeared on CNBC a week before the massive risk aversion began, saying succinctly that the USD was way undervalued.
    A couple of weeks before, another messenger, Larry Kudlow, spoke of intervention. Just as the low USD was beginning to benefit the US economy and pull it out of the quagmire, the trigger was pulled in favor of USD strength to appease the large holders.
    Maybe the world was ripe for the sudden deleveraging that has occurred, but I can’t help but think that the tsunami of money that began moving with this prod, only exacerbated the speed and extent of this move to epic proportions. What do the large holders of US currency feel about their predicament now, with their more valuable dollars but their economies in ruin?
    And what use are those dollars, that even if there is the slightest hint of a withdrawl, will turn the tsunami to flow back in the direction it came from?

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  4. I dont see a clear argument for an absolute $ strength. surely its rallied from its lows, but the picture is cloudy.
    1) its interesting to see against which countries the dollar is stronger or weaker than expected.
    using PPP (Purchasing Price Parity), the currencies stronger than expected (ie $ still weak) are:
    EZ (PPP= 1.178, Spot = 1.276), overpriced 1000 pips
    JPY (PPP = 116, spot = 98.16) over by 1800 pips

    The currencies that are weaker than expected (ie $ strong):
    GBP (PPP = 1.53, spot = 1.3743) under by 1600 pips
    CAD (PPP = 1.22, spot = 1.28) under by 600 pips
    AUD (PPP = .700, spot = .65) under by 500 pips

    so against the two biggest majors, the $ is still historically weak.

    2) the $ index, currently at 88, is still far below its historical highs. in 2002, it was at 120, so its hard to argue the $ has strengthened all that much. True, it got as low as 71 briefly, but its still 3000 pips below its high…

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  5. further, the $ index weighting is
    EURUSD :0.576
    USDJPY : 0.136
    GBPUSD : 0.119
    USDCAD : 0.091
    USDSEK : 0.042
    USDCHF : 0.036

    so the two most overpriced currencies are the two most highly weighted in the index. This indicates that the $ potentially is still quite under-valued. surprising…

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