US dollar rises to 20-year high costs US companies billions in profit

The dollar’s rise to its highest level since 2002 has resulted in billions in losses for US companies this year, from laundry detergent makers to dating apps.

With earnings growth beginning to slow, the additional currency impact will mean the difference between growing and contracting for some companies for the rest of the year.

Goldman Sachs’ index of US companies with primarily international exposure has fallen twice as much as its index of companies primarily domestically exposed, down about 15 percent and 7 percent respectively this year. In comparison, the internationally exposed index rose about 27 percent last year, compared to 30 percent for the domestically oriented index. In 2020 and 2019, the international index outperformed the domestic index.

Currency effects, largely attributable to the dollar, are expected to knock about $40 billion off the profits of North American companies in the first half of this year, according to financial technology firm Kyriba. That’s compared to about $8 billion in the first half of last year.

A strong dollar increases revenues for companies with large global companies by decreasing the value of their overseas revenues and making their products less competitive with local rivals.

While US inflation has hit its 40-year high, the dollar has hit its highest level since 2002, up about 9 percent this year, thanks to rising interest rates and better economic performance in the US than its G10 peers. Faster growth in the US than elsewhere has also resulted in lower revenues for companies with high international exposure.

Microsoft became the most talked-about company this month, blaming currency movements on a profit warning, cutting revenue forecasts by $460 million less than six weeks after issuing bullish forecasts.

It’s not alone. Bret Taylor, co-chief executive of Salesforce, said last month the headwinds from the company’s currency were “unprecedented” as it doubled its forecast of its full-year FX impact to $600mn.

Retailer TJX cut its revenue forecast by $700 million, while apparel brand Guess said that “currencies would be the difference between our current expectation of a contraction in operating profit versus modest growth in operating profit.”

The dollar’s strength was driven by higher interest rates and the faster US economic recovery after the downturn at the start of the coronavirus pandemic. However, both phenomena can change.

While the Federal Reserve tightened faster than many of its counterparts, that will change when the European Central Bank raises interest rates in July.

Growth in the US is also starting to slow and will slow further as the Fed raises interest rates. “All of this suggests we shouldn’t see that much dollar outperformance unless there’s a big safe haven,” said Karl Schamotta, chief market strategist at Corpay.

The dollar rises when the US outperforms its competitors and when global growth slows as it attracts investors seeking safe assets.

Such a safe haven could be in the cards. US data on Friday showed that consumer prices had risen faster than expected — 8.6 percent year-on-year — which in turn prompted investors in futures markets to bet on an extremely aggressive monetary tightening by the Federal Reserve in the coming months. months.

Starting Friday, investors are betting that the Fed will raise interest rates in half-point jumbo increments in its next four meetings — June, July, September and November — before slowing to a quarter-point hike in December. The Fed’s goal is to slow the US economy, but some fear moves of this magnitude could send the country into recession.

“I don’t think the dollar run is over yet,” said George Goncalves, chief of macro strategy at MUFG Securities Americas.

“People want it to be over so they can move on. That’s usually a tell-tale sign that there’s more to do. I don’t think we’ve seen that liquidity event where we’ve seen that dollar jostling that is typical during high-risk events.

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