The US dollar’s strength is having a big, negative impact on some sectors. It’s not over yet, either.
The dollar is on a tear the last few years and it’s causing some dollar-sensitive companies to shed a tear as surges ever higher.
“The strengthening dollar has seen companies which historically underperform in a strong dollar environment lag behind their peers by almost 15 percent since the start of the year,” according to financial information services firm Markit.
According to Markit:
- Companies negatively exposed have underperformed their peers in ten of the last 11 months.
- Companies which perform well in strong dollar times have seen the opposite and outperformed by 5 percent.
- Foreign revenues reported in dollars impact companies like Coca-Cola and Russian internet search provider Yandex.
US exporters have definitely taken a hit when it comes to a strong dollar, as customers must pay more for their products than those of their foreign competitors.
One of the main drivers behind the dollar’s strength is that the US economy is in the midst of a recovery, which is likely only getting started, while economies in Japan, the UK and Europe are stumbling backwards, prompting various types of stimulus. Further to that, most experts see rates rising in the US, which will also strengthen the dollar as cash from around the world starts coming for the yield.
According to Markit, the US alone “has fuelled global markets with $3.7 trillion since the crisis.” And now the G20 has said it will try to add another $2 trillion in the next few years. This is supposed to keep the dollar in check as other regions regain their footing. If that doesn’t happen, the losses by corporates in sensitive sectors such as energy and consumer goods will continue.
Also, many companies will see earnings impacts. One company Markit cites is Coca-Cola, which is exposed to dollar strength when it translates its bountiful foreign profits into bucks. Coca Cola’s stock is down 4 percent year to date and it’s been one of the leading shorted stocks as well, Markit says.
But at least one big US exporter, Caterpillar, has been able to hedge against that dollar strength. According to the company’s CEO, Doug Oberhelman, Caterpillar “is a big producer” in places currently seeing local currency weakness. “In fact in the latest quarter, dollar strength was a little bit of a tailwind for us because we tend to produce and sell in those markets to offset costs and revenue,” he said.
“For US-based multinationals that don’t have modern currency risk management programs in place,” writes Andy Gage, VP of Strategic Market Development at FX exposure-management systems provider FiREapps in a recent blog post, “the dollar’s rise likely means negative currency impact. And deeper impacts like credit rating downgrades and debt covenant breaches” could follow.