Dollar’s stubborn strength dents US companies’ earnings cheer
By Saqib Iqbal Ahmed
NEW YORK, May 10 (Reuters) -A host of U.S. companies are faced with a problem they had not expected to confront this year: a rising dollar.
Many market participants believed the dollar would fall on the back of interest rate cuts that both investors and the Federal Reserve had penciled in for 2024. Those cuts are yet to come, and the U.S. dollar index .DXY, which measures the greenback's strength against a basket of currencies, is up 4% in 2024 and has climbed about 16% in the last three years.
While those gains reflect the relative strength of the U.S. economy, a rising dollar can be a problem for some companies. A strong U.S. currency makes it more expensive for multinational companies to convert foreign profits into dollars, while also hurting the competitiveness of exporters' products. Companies guarding against dollar strength must also devote resources to hedging strategies that offset the effects of the rising currency on their bottom lines.
All told, every 10% year over year rise in the dollar shaves some 3% from S&P 500 earnings, according to estimates from BofA Global Research.
The dollar's strength in the latest quarter comes during a period of robust corporate profits. With well over 80% of the S&P 500 having reported first quarter results, companies are on track to have increased earnings by 7.8%, up from an expectation of 5.1% growth in April, according to LSEG IBES. Nonetheless, companies from Apple Inc AAPL.O and IBM IBM.N to Procter & GamblePG.N have mentioned foreign exchange as a headwind.
The strong dollar "has caused a lot of consternation," said Andrew Gage, senior vice president at treasury and finance solutions firm Kyriba. "CFOs are asking their treasury teams to be much more diligent in managing the risk that comes from that strong dollar."
The dollar’s gains are being fueled by U.S. economic strength, which is eroding expectations for how deeply the Fed will be able to cut rates this year. Investors are pricing in around 50 basis points of rate cuts for 2024, compared to more than 150 basis points forecast at the beginning of the year, futures markets show.
Yields in the U.S. stand above those in many other economies as a result, bolstering the dollar's appeal over other currencies.
"Nearly all FX practitioners were expecting the dollar to be weaker this year with the anticipation of lower U.S. interest rates," said Amo Sahota, director at foreign exchange risk management firm Klarity FX in San Francisco. "Corporates were licking their lips, essentially waiting for that to play through."
Not all S&P 500 companies are equally affected by the dollar's swings. The information technology, materials and communication services sectors top the list with the most international revenue exposure, garnering as much as 57%, 52% and 48% of their total revenue respectively from abroad, data from FactSet showed.
In the latest quarter, Coca-Cola KO.N reported a 9% currency headwind, noting it was driven by currency devaluation in markets experiencing intense inflation. Conglomerate 3M MMM.N said foreign currency negatively impacted adjusted margins by a larger-than-expected 0.6 percentage points, while Apple called out nearly four percentage points of negative impact from foreign exchange on its quarterly revenue.
To prevent exchange rate moves creating big swings in earnings, businesses use various hedging strategies including those that employ forward and options contracts.
Some firms that advise companies on managing FX risk noted a rise in hedging activity in recent weeks, though quieter currency markets have made hedging a less urgent issue for some companies even as the dollar has risen. In March, Deutsche Bank’s index of currency volatility .DBCVIX fell to its lowest level since September 2021.
"Towards the end of the first quarter, we did see some complacency on the hedging front. Currency volatility fell to a multi-year low, which led to a lack of a sense of urgency," said John Doyle, head of trading and dealing at Monex USA in Washington. "However, we have seen a recent uptick in hedging over the past month and a half."
Karl Schamotta, chief market strategist at payments company Corpay, said the subdued level of currency volatility may be making some companies "almost too complacent about the risks they are facing."
Analysts at BofA Global Research said that while they believe the dollar will eventually weaken over the medium term, “the turning point has become harder to time.”
"The case to hedge USD upside risks for the rest of the year has materially grown for U.S. corporates," they said.
GRAPHIC: Dollar strength https://tmsnrt.rs/3ylAGhC
GRAPHIC: FX risk https://reut.rs/3ychhjr
Reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Daniel Wallis
免責聲明: XM Group提供線上交易平台的登入和執行服務，允許個人查看和/或使用網站所提供的內容，但不進行任何更改或擴展其服務和訪問權限，並受以下條款與條例約束：（i）條款與條例；（ii）風險提示；（iii）完全免責聲明。網站內部所提供的所有資訊，僅限於一般資訊用途。請注意，我們所有的線上交易平台內容並不構成，也不被視為進入金融市場交易的邀約或邀請 。金融市場交易會對您的投資帶來重大風險。
所有缐上交易平台所發佈的資料，僅適用於教育/資訊類用途，不包含也不應被視爲適用於金融、投資稅或交易相關諮詢和建議，或是交易價格紀錄，或是任何金融商品或非應邀途徑的金融相關優惠的交易邀約或邀請。
本網站的所有XM和第三方所提供的内容，包括意見、新聞、研究、分析、價格其他資訊和第三方網站鏈接，皆爲‘按原狀’，並作爲一般市場評論所提供，而非投資建議。請理解和接受，所有被歸類為投資研究範圍的相關内容，並非爲了促進投資研究獨立性，而根據法律要求所編寫，而是被視爲符合營銷傳播相關法律與法規所編寫的内容。請確保您已詳讀並完全理解我們的非獨立投資研究提示和風險提示資訊，相關詳情請點擊 這裡查看。
