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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.