The dollar’s rise to its highest level since 2002 has led to billions in losses this year for American businesses, from detergent makers to dating apps.
As earnings growth begins to slow, for some companies the added currency impact will be the difference between expansion and contraction for the rest of the year.
The Goldman Sachs index of U.S. companies with primarily international exposure has fallen twice as much as its index of companies with primarily domestic operations, down about 15% and 7% this year respectively. By comparison, the internationally exposed index rose about 27% last year compared to 30% for the domestically focused index. In 2020 and 2019, the international index outperformed the national index.
Currency effects, largely driven by the dollar, are expected to have knocked about $40 billion off North American corporate profits in the first half of this year, according to fintech firm Kyriba. That compares to about $8 billion in the first half of last year.
A strong dollar affects the revenues of companies with large international operations by reducing the value of their profits abroad and making their products less competitive with their local rivals.
Although US inflation has hit 40-year highs, the dollar this year hit its highest level since 2002, up around 9% this year, driven by higher interest rates and better performance economies in the United States than its G10 peers. Faster growth in the United States than elsewhere has also led to lower revenues for companies with large international exposure.
Microsoft this month became the most high-profile company to blame currency moves for a profit warning, slashing revenue guidance by $460 million less than six weeks after issuing a bullish forecast.
He is not alone. Bret Taylor, co-chief executive of Salesforce, said last month that the company’s FX headwinds were “unprecedented” as it doubled its full-year FX impact forecast to 600 million. of dollars.
Retailer TJX slashed its revenue forecast by $700 million, while clothing brand Guess said ‘currencies would represent the difference between our current expectations of operating profit contraction and modest growth in profit. exploitation”.
The strength of the dollar was driven by higher interest rates as well as the faster economic recovery in the United States from the slowdown at the start of the coronavirus pandemic. However, both phenomena could be called upon to change.
While the Federal Reserve had been tightening faster than many of its peers, that will begin to change when the European Central Bank raises interest rates in July.
Growth in the United States is also beginning to slow and will continue to decline as the Fed raises rates. “All of this suggests that we shouldn’t see as much dollar outperformance unless there’s a big safe-haven move,” said Karl Schamotta, chief market strategist at Corpay.
The dollar rises when the United States outperforms its peers and when global growth slows, as it attracts investors looking for safe assets.
Such a refuge move could be in the cards. US data on Friday showed consumer prices rose at a faster pace than expected – 8.6% year-on-year – prompting investors in futures markets to bet on extremely aggressive monetary tightening from the Federal Reserve in the coming months.
Starting Friday, investors are betting that the Fed will hike interest rates in giant half-point increments at its next four meetings — June, July, September and November — before slowing to a one-point hike. quarter point in December. The Fed’s objective is to slow the American economy, but certain movements of fear of this magnitude could tip the country into recession.
“I don’t think the race for the dollar is over yet,” said George Goncalves, head of macro strategy at MUFG Securities Americas.
“People want it over so they can move on. It’s usually a telltale sign that there’s still a long way to go. I think we haven’t seen that liquidity event where we’ve seen that dollar rush that there is usually in risk events.