The Mighty US Dollar is Doing Corporate Earnings No Favors

A strong US dollar is flexing its muscles on the world stage, and you can count many multinational US-based companies among those not especially enamored with the dollar’s showboating.

This earnings season has demonstrated just how much a powerful greenback can eat into the profits of US multinationals. Here‘s a breakdown.

Painful Exchange

The dollar is effectively backed by the world’s most powerful hypeman, the US Federal Reserve. The Fed is focused on taming inflation this year, and their weapon of choice is hiking interest rates. Higher interest rates draw in investments, especially from abroad, which boosts the demand for the dollar.

Meanwhile, the European Central Bank has been less aggressive in raising interest rates than the Fed as the war in Ukraine and the “weaponization” of energy markets by Russia has left the European economy in a bind. Japanese officials are holding off on rate hikes in an effort to stimulate post-pandemic growth. The resulting imbalance has pushed the dollar to its strongest position in years, including parity with Euro for the first time in two decades. Awesome for American tourists, not so much for US companies doing business abroad:

• A strong US dollar hurts American companies because it shrinks the value of their international sales. IBM said last week that the mighty greenback could reduce its revenues by $3.5 billion this year and by $900 million in the second quarter.
• Johnson & Johnson said it could lose out on $4 billion in sales this year due to the strong dollar, cigarette giant Philip Morris said it likely missed out on $500 million in the second quarter and Netflix said its sales were dented by $339 million. The dollar phenomenon works both ways, of course: UK luxury goods maker Burberry said this month that the strong dollar will add $200 million to its revenue this year.

Big Hurt on Big Tech: Of all the sectors grappling with a strong dollar, none are nearly as exposed as Big Tech. S&P 500 tech companies made 59% of their sales abroad last year, according to Goldman Sachs, compared to the index’s 29% average.

Golden Ticket: Foreign countries with depreciating currencies and large debts denominated in dollars aren‘t exactly in love with the situation. Argentina and Turkey are already struggling to pay interest and Sri Lanka defaulted for the first time. Zimbabwe has come up with a novel solution: on Monday, the country‘s central bank said it will introduce gold coins as legal tender to offset a decline in the Zimbabwean dollar.