The rapid rise in the US dollar since the start of the year is a double-edged sword for US multinational companies, forcing some of them to decide whether to hedge or reposition their operations abroad to avoid fallout.
For an importer, the appreciation of the dollar against the euro, yen or British pound is a plus because it makes the products they buy cheaper.
But for a US exporter, products sold in dollars have become more expensive, increasing the risk of losing customers and seeing sales fall.
And they also lose money when they convert foreign earnings back into dollars.
Many companies have already revised their profit forecasts for the year to account for the changing exchange rate, including computer giant Microsoft, which warned that quarterly revenue will fall by $460 million and net profit by $250 million as a result of the fall.
Adobe, Salesforce, Biogen and Pfizer have all warned that the dollar’s rapid appreciation will have a bigger impact on their accounts than expected.
Companies that generate the majority of their revenue outside the United States are the most exposed, starting with technology giants, medical device manufacturers and service companies, according to Kyriba, a corporate cash management platform.
Kyriba estimates that currency effects could push S&P 500 company profits to $40 billion in the first half of the year.
The Federal Reserve’s decision to aggressively raise interest rates to curb rampant inflation, combined with an influx of funds into the country from investors seeking a safe haven in uncertain times, have combined to boost the US dollar.
The greenback is up 13 percent against the euro in the past 12 months, approaching parity, and is up 22 percent against the yen.
“In the short term, that’s a good thing for the United States, because it means all imports are cheaper and inflation is pushed down,” said Desmond Lachman of the American Enterprise Institute think tank.
But further afield, the effect on the US economy is more nuanced, because if exports fall, “the United States’ trade deficit widens and we get more foreign debt.”
But multinationals “don’t control these large items,” he explained.
However, they can mitigate the effect of fluctuations in foreign currencies in which they price and invoice goods by employing hedging strategies – using financial instruments that provide some sort of insurance against losses caused by the changing exchange rate.
Most companies already have hedging programs in place and they change their plans on a quarterly or even monthly basis, sometimes in an attempt to predict currency movements, said Kyriba’s Bob Stark.
But it’s not an exact science, he noted, especially at a time of great uncertainty about the direction of inflation, interest rates and the possibility of a recession.
But “since the start of the pandemic, CFOs have become very good at looking at multiple scenarios and building on them,” Stark said.
Sporting goods giant Nike, for example, warned Monday that currency effects would reduce annual revenues by several percentage points. But the profit hit is much lower because of the hedging.
The current high volatility in the foreign exchange markets also means it costs more to hedge, so some companies choose not to use those instruments.
Among the other tools at their disposal, multinationals can reduce their exposure using other techniques, such as paying their Japanese suppliers in dollars, renegotiating prices, or even buying their supplies in different countries.
Or they could simply wait for the US currency to weaken before repatriating their gains.
However, once the exchange rate strengthens, there is limited leeway, according to Nikolai Roussanov, a professor of finance at the University of Pennsylvania, especially when prices also rise due to supply chain problems and energy costs.
“If you try to react to something that’s already happening, it can bite you later because some of these movements are quite transient,” he told AFP.