U.S. multinationals also become victims as the strong dollar wields its sickle

Author: Zhitong Finance Zhao Jinbin This year, many American companies are facing a problem they did not expect: the appreciation of the US dollar.
Zhitong Finance APP learned that this year, many American companies are facing a problem they did not expect: the appreciation of the US dollar.
Many market participants believe the dollar will fall as both investors and the Federal Reserve expect to start cutting interest rates this year.
However, interest rate cuts have not yet begun. The U.S. dollar index, which measures the dollar\’s strength against a basket of currencies, is up 4% so far in 2024. It has risen about 16% in the past three years.
While these gains reflect the relative strength of the U.S. economy, a rising dollar could be a problem for some businesses.
A strong U.S. dollar makes it more expensive for multinational companies to convert overseas profits into U.S. dollars. It also hurts the competitiveness of exporters\’ products.
Companies that protect against a stronger dollar must also devote resources to hedging strategies to offset the impact of a rising dollar on their profits.
According to estimates from Bank of America Global Research, in general, for every 10% year-on-year increase in the U.S. dollar, the earnings of S&P 500 companies will decrease by about 3%.
The dollar\’s strength in the latest quarter coincided with strong growth in corporate profits.
According to LSEG IBES, more than 80% of companies in the S&P 500 have reported first-quarter results. These companies are expected to achieve earnings growth of 7.8%. This is higher than the 5.1% forecast in April.
Still, companies from Apple (AAPL) to IBM (IBM) to Procter & Gamble (PG) have cited foreign exchange as a negative factor.
Andrew Gage, senior vice president at fiscal and financial solutions company Kyriba, said the strength of the U.S. dollar caused a lot of panic.
CFOs are asking their finance teams to be more diligent in managing the risks posed by a strong dollar.
Anticipating interest rate cuts The dollar\’s rise has been driven by a strengthening U.S. economy. This has weakened expectations for how much the Federal Reserve will cut interest rates this year.
The futures market shows that investors expect an interest rate cut of about 50 basis points in 2024. In contrast, expectations at the beginning of this year once exceeded 150 basis points.
As a result, U.S. Treasury yields are higher than those in many other economies. This enhances the U.S. dollar\’s attractiveness relative to other currencies.
Amo Sahota, director of Klarity FX, a foreign exchange risk management company in San Francisco, said: Almost all foreign exchange practitioners expect that the U.S. dollar will weaken this year as U.S. interest rates are lowered.
Many businesses can\’t wait for this to happen.
However, not all S&P 500 companies are equally affected by dollar fluctuations.
FactSet data shows that the information technology, materials and communication services industries have the largest exposure to international revenue, accounting for 57%, 52% and 48% of their total revenue respectively.
In the latest quarter, Coca-Cola (KO.US) said it suffered a negative exchange rate-related impact of up to 9 percentage points. It pointed out that this was caused by the depreciation of the market currency with severe inflation.
3M (MMM.US) also said that the negative impact of foreign exchange on its adjusted profit margin exceeded expectations by 0.6 percentage points. Apple said that the negative impact of foreign exchange on its quarterly revenue was close to 4 percentage points.
Adopting hedging strategies In order to prevent exchange rate fluctuations from causing sharp fluctuations in earnings, companies use various hedging strategies, including hedging strategies using forward and option contracts.
Some firms that advise companies on how to manage foreign exchange risk have noted that hedging activity has increased in recent weeks. However, despite the strength of the dollar, foreign exchange markets have calmed down, making hedging less urgent for some companies.
March. Deutsche Bank\’s Currency Volatility Index fell to its lowest level since September 2021.
At the end of the first quarter, we did see some complacency on the hedging side.
Currency volatility has fallen to its lowest levels in years, leading to a lack of urgency, said John Doyle, head of trading and trading at Monex USA in Washington. However, over the past month and a half, we have seen a recent uptick in hedging activity.
Karl Schamotta, chief market strategist at payments company Corpay (CPAY.US), said lower exchange rate volatility may make some companies too complacent about the risks they face.
Analysts at Bank of America Global Research said that although they believe the dollar will eventually weaken in the medium term, the turning point has become increasingly difficult to grasp.
For U.S. companies, the case for hedging against the dollar’s ​​upside risk for the remainder of the year has strengthened significantly, they said.