WASHINGTON, United States (AP) — The victims vary: fast-food colossus McDonald’s, technology giant Oracle, medical device maker Cooper Cos -the culprit’s the same: a surging US dollar.
A symbol of American economic might, the rising dollar is denting the earnings of US companies that operate overseas. The damage started showing up in results for the July-September period, and the picture will likely get uglier as companies report earnings for the final three months of 2014.
“It’s clearly a drag on corporate profits,” says David Kelly, chief market strategist at JP Morgan Funds.
A few months ago, Kelly notes, analysts had expected a double-digit annual rise in corporate profits in the fourth quarter. Now, in part because the dollar is carving into earnings, they’re forecasting just 4.6 per cent overall earnings growth for companies in the Standard & Poor’s 500 index.
A prolonged drop in profits risks rattling investors and pressuring stocks.
Among major industries, technology companies and producers of energy and raw materials generally derive the highest percentage of revenue from abroad, according to S&P Dow Jones Indices.
Since June 30, the dollar has jumped 16 per cent against the Japanese yen. Against the euro, it’s up 18 per cent. Against the Brazilian real, nearly 20 per cent.
Investors are buying dollars and driving it higher largely because the American economy is humming while other economies are sputtering. In Europe and Japan, growth has flat-lined. In China, it’s slowed.
Investors are also seizing on higher interest rates in the United States: The super-safe 10-year US Treasury note yields 1.74 per cent, miserly by historical standards but richer than the 0.46 yield on 10-year German government bonds or the 1.59 per cent on 10-year Spanish bonds.
A higher-valued dollar delivers a double blow to American exporters: It makes US products costlier and therefore less competitive in foreign countries. And it means the revenue that US companies collect in, say, euros is worth fewer dollars once they bring the money home. In that way, the strong dollar shrinks profits, too.
Across the S&P 500 index, nearly half of total revenue comes from outside the United States.
American companies are hardly alone in suffering from currency swings. Swiss companies are hurting because their currency, the franc, is much stronger than the euro. Their plight worsened on Thursday, when the Swiss central bank suddenly abandoned its effort to cap the value of the franc against the euro. The news sent the franc soaring against the euro. The Swiss National Bank abandoned the cap because it had proved too costly, requiring ever-larger purchases of euros.
Consider McDonald’s, which has locations in more than 100 countries. Revenue fell 6 per cent in November from a year earlier at its company-owned and franchise restaurants, and the drop was due largely to the rising dollar.
If currency values had remained flat, revenue would have inched up 0.1 per cent. McDonald’s warned last month that the higher dollar could shave up to 9 cents off its fourth-quarter earnings per share, which analysts expect to be US$1.23.
At Oracle, the stronger dollar was the difference between profit growth and decline in its last fiscal quarter. For the three months through November 30, Oracle’s net income fell 2 per cent. If the dollar had stayed flat, net income would have risen 3 per cent, Oracle said.
Companies can enter into hedging arrangements that act like insurance policies against the rising dollar.
“But hedging is never perfect,” says Mark Luschini, chief investment strategist at Janney Montgomery Scott. “They may be behind the curve,” given the dollar’s propulsive rise.
For foreign companies that do business in the United States, of course, the strong dollar has just the opposite effect: It helps.
Japanese auto giant Toyota in November raised its profit projection for the year through March 2015 by 220 billion yen (US$1.8 billion) to 2 trillion yen (US$16.7 billion), in part because the stronger dollar would boost earnings.
J.P. Morgan’s Kelly says the higher dollar could help the ailing economies of Europe and Japan.
“It may help stabilise the global economy,” Kelly says.
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Buck up, profits down: High dollar dents US company earnings
