US multinationals struggle with rising dollar – AFR

The US dollar’s rapid appreciation since the beginning of the year is a double-edged sword for American multinationals, prompting some of them to decide whether to hedge or reposition their overseas operations to avoid the fallout.

For an importer, the rise in the greenback 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 slumping sales.

And they also lose money converting foreign earnings back into dollars.

Many companies have already revised their earnings forecasts for the year to reflect changing exchange rates, including computer giant Microsoft, which warned that its quarterly sales fell by $460 million and its net income by $250 million due to the currency slump will sink.

Adobe, Salesforce, Biogen and Pfizer have all warned that the dollar’s rapid rise will affect their accounts more than expected.

According to Kyriba, a corporate cash management platform, companies that generate the majority of their sales outside of the United States are most at risk, starting with tech giants, medical device manufacturers and service providers.

Kyriba estimates that the currency impact could mean a $40 billion loss to S&P 500 companies’ earnings in the first half of the year.

The US Federal Reserve’s decision to aggressively raise interest rates to combat rampant inflation, coupled with an influx of funds into the country from investors looking for safe haven during uncertain times, have given the US dollar a boost.

The greenback is up 13 percent against the euro over the past 12 months, nearing 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 it pushes down inflation,” said Desmond Lachman of the American Enterprise Institute think tank.

But further out, the impact on the US economy is more nuanced, because when exports fall, “the United States’ trade deficit goes up and then we get more external debt.”

But multinationals “have no control over these big things,” he explained.

However, they can mitigate the effects of fluctuations in the foreign currencies in which they price and invoice goods by employing hedging strategies – using financial instruments that provide a form of insurance against losses caused by changes in the exchange rate.

Most companies already have hedging programs in place and change their plans on a quarterly or even monthly basis, sometimes trying 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 pandemic began, CFOs have gotten very good at looking at multiple scenarios and building on top of them,” Stark said.

Sporting goods giant Nike, for example, warned on Monday that currency effects would reduce annual sales by several percentage points. But the drop in earnings is much smaller because of the hedging.

The current high volatility in the currency markets also means that hedging is more expensive, leading some companies to choose not to use these tools.

Among the other tools at their disposal, multinationals can reduce their risk through other techniques, such as paying their Japanese suppliers in dollars, renegotiating prices, or even buying their supplies from other countries.

Or they can just wait for the US currency to weaken before cutting back their gains.

However, once the exchange rate recovers, there is limited room for maneuver, according to Nikolai Roussanov, a finance professor at the University of Pennsylvania — especially if prices also rise due to supply chain issues and energy costs.

“If you try to react to something that’s already happening, it might bite you later because some of those movements are pretty transient,” he told AFP.