By Elliot M. Kass
In an early 2019 round of corporate earnings announcements, company after company mentioned the impact of the dollar’s strength. According to a February 7 Barron’s analysis, for example, Apple said adverse exchange rates shaved its fourth-quarter sales growth by 2 percentage points, while Honeywell International and 3M said the negative impact on their revenues was 1 percentage point and 2.7 points, respectively.1
SunTrust analyst William Chappell cut his 2019 and 2020 earnings estimates for Proctor & Gamble by 2 percentage points in late February, citing the stronger dollar. P&G generates about 56 percent of its sales outside of North America, leaving it more exposed to currency fluctuations than the average S&P 500 company, which generates about 30 percent of sales overseas.2
Among U.S. corporates, the tech sector has the greatest foreign currency exposure. Chip maker Qualcomm, for instance, generates more than 95 percent of its sales outside the U.S. Among U.S. consumer goods companies, Nike generates about 60 percent of its sales abroad, while industrial companies 3M and Honeywell realize about 40 percent of their sales outside the U.S.3
All of this has had an element of surprise. When U.S. Federal Reserve Chairman Jerome Powell began signaling an end to interest rate hikes earlier this year, the general expectation was that the dollar would weaken, since currencies tend to decline in value along with interest rate movements. Instead, the dollar gained around 8 percent with respect to other currencies during the past 12 months, although that growth has slowed to around half a percent since the start of this year.4
As the dollar grows in strength, the revenue generated by U.S. companies abroad in other currencies declines. U.S. exports lose ground as well, since they become more expensive when they’re priced in other currencies.
Indicative of the dollar’s mounting strength, currency-related losses for all publicly held North American companies came to $11.81 billion in the third quarter of 2018, according to the most recent FireApps currency impact report. Those losses were 12 times greater than the aggregate currency-related losses reported by North American companies for Q2 2018, with six times as many companies reporting a negative impact compared with the preceding quarter, according to the report.5
While unexpected in the short term, the enduring strength of the dollar is a continuation of the long-term trend that began in 2008. Back then, as the world’s financial system started to melt down, the dollar once again emerged as safe haven refuge for investors and central banks the world over. Reflecting this reality, dollar-denominated borrowing soared from less than 10 percent of global GDP in late 2007 to more than 14 percent in Q1 2018, according to the Bank of International Settlements.6
The chief factors that lent the dollar strength then are still in play today: The U.S. economy looks strong compared with the economies of other nations and continues to attract investors; most international trade takes place in dollars; and the dollar remains the main reserve currency for most of the world’s central banks.
But some new developments are adding fuel to the dollar’s strength as well. Like the Federal Reserve, the European Central Bank (ECB) reversed course late last year after an extended period of monetary easing, preparing to slowly tighten its money supply and push interest rates upward. This had the potential to make the euro more attractive.
Now, however, Europe’s economy is softening, and ECB chief Mario Draghi says he’s prepared to follow the Fed’s lead and begin loosening the monetary strings again, potentially diminishing the euro’s allure. Meanwhile, the most trusted euro-denominated investment—German government bonds—are in short supply, whereas there is no difficulty in obtaining U.S. treasuries.7
An even bigger twist has been the tariffs the U.S. has imposed on a wide range of Chinese goods. Tariffs on Chinese goods make U.S. goods more attractive, leading to increased demand for dollars with which to buy them. More demand for dollars, however, strengthens the currency, leading to higher prices and less demand for U.S. exports.
At this point, the danger of a rising dollar is still considered to be a relatively small threat to U.S. corporate earnings and unlikely to impact corporate decision-making. Back in the 1990s, for instance, the dollar was around 15 percent higher compared with other currencies than it is today, forcing companies to alter their pricing strategies and rethink where they made their goods.8
But if trade challenges continue, the ECB softens faster than the Fed, or some economic jolt heightens demand for the sanctuary of U.S. treasury bonds, then the dollar’s outsized strength could begin to take a bigger toll on corporate earnings and the U.S. economy.
The U.S. dollar remains strong despite the Fed’s softening monetary policy, lowering U.S. corporate revenues from overseas and making U.S. exports more expensive. While this isn’t a major threat to the U.S. economy at present, that could change if the dollar continues to gather strength.
Elliot Kass is a journalist who has covered global business and technology from New York, London, and San Francisco for more than 30 years.
1. “The Stock Market Might Not Be Ready for a Stronger Dollar,” Barron’s; https://www.barrons.com/articles/strong-dollar-saps-revenues-for-u-s-companies-51549533600?mod=article_inline
2. “What a Strong Dollar Means for Stocks,” Barron’s; https://www.barrons.com/articles/what-a-strong-dollar-means-for-stocks-51551713042
4. U.S. Dollar Index (DXY), MarketWatch; https://www.marketwatch.com/investing/index/dxy
5. “FireApps Q3 2018 Currency Impact Report,” FireApps; https://www.fireapps.com/resources/download-currency-report/?id=1909
6. “Global liquidity: changing instrument and currency patterns,” Bank of International Settlements; https://www.bis.org/publ/qtrpdf/r_qt1809b.htm
7. “The Dollar Is Still King. How (in the World) Did That Happen?” The New York Times; https://www.nytimes.com/2019/02/22/business/dollar-currency-value.html
8. “The Stock Market Might Not Be Ready for a Stronger Dollar,” Barron’s; https://www.barrons.com/articles/strong-dollar-saps-revenues-for-u-s-companies-51549533600?mod=article_inline