Markets were jittery this week as Greece’s new government dug in its heels ahead of negotiations with its creditors. But that wasn’t the only problem. On Tuesday the Dow slid by 2% after several US multinationals reported disappointing earnings or outlooks due to the stronger dollar.
Procter & Gamble cited “unprecedented” currency fluctuations as a key cause of a 5% drop in fourth-quarter sales and a 31% drop in profits. Microsoft and United Technologies were further victims. Even Apple’s record-breaking results were tarnished by a rising dollar. The greenback has gained almost 18% against a basket of major trading partners’ currencies since July 2014.
What the commentators said
Much of America Inc is struggling with currency effects, but the sector with the greatest exposure is technology, said Markit’s Simon Colvin. Among the firms with the most overseas exposure, it is the best-represented sector. The likes of Procter & Gamble and Microsoft have expanded aggressively overseas in recent years in search of growth, says Paul Ziobro in The Wall Street Journal. Now they are suffering from the translation effect: while sales in overseas markets may have kept growing in local currency terms, they are worth less when converted back into dollars.
Moreover, as costs are often denominated in dollars, margins and profits decrease. Future sales and profits may also be lost, as a strong currency makes export-orientated firms less competitive.
Foreign sales are worth around half of the S&P 500 firms’ overall revenues, and the dollar is now beginning to undermine the expansion in the export-orientated manufacturing sector, judging by the weakness in the latest orders of durable goods, according to Anthony Karydakis of broker Miller Tabak. However, the overall US economy is relatively well insulated, with exports comprising just 15% of GDP.
Meanwhile, the other main theme of the earnings season – the crashing oil price – causes damage for oil producers and explorers, said Justin Lahart on wsj.com, but “the net effect of lower gasoline prices on consumers’ buying power, while quieter, is strongly positive”. Note that consumer confidence has just risen to a seven-year high. While multinationals in the major indices will keep struggling amid ongoing dollar strength, “domestically focused companies should continue to do fine”.