A surging dollar creates good headlines for Americans looking to travel or send money abroad. But for US companies that generate a big chunk of their earnings overseas, the greenback’s gain has become a serious pain.
The US Dollar Index, which tracks the buck against six other important currencies, is at a near 20-year high. It is up 19 per cent since the start of the year and continues rising. The euro has slipped below parity against the dollar for the first time in 20 years. Against the British pound, the dollar has gained over a quarter to near record highs, and at a level against the Japanese yen not seen since 1998.
US companies derive about 30 per cent of their sales outside the US. But for the tech sector that number reaches more than 50 per cent. A strong buck not only makes their products more expensive overseas, but revenues earned abroad also get dinged when converted back into dollars. Even with currency hedging, the earnings pressure will remain.
Morgan Stanley reckons that every 1 per cent change in the Dollar Index knocks 0.5 per cent off company profits. Combined with the effects of higher inflation and a consumer demand dip, the appreciation should shave 10 per cent off of fourth-quarter S&P 500 earnings.
But why worry? Analysts see earnings per share from S&P 500 companies touching $218 this year then climbing to $259 in 2024, up nearly a quarter from 2021.
That seems optimistic given that companies already struggle with margin compression and the Federal Reserve remains committed to fighting inflation with more interest rate rises to come.
More domestically oriented US companies should have an easier go. The S&P 500 US Revenue Exposure index, which tracks the stocks in the benchmark with higher than average US revenue exposure, is down 14 per cent this year. That reflects jitters over a US recession and a sudden drop-off in consumer demand. Even so, it has performed better than the S&P 500 Foreign Revenue Exposure index, down nearly twice as much.
The strong dollar may serve as a handy excuse for disappointing earning results. Just as some retailers will blame the weather instead of boring clothing for weak turnover, currency fluctuations offer a useful distraction from a company’s more fundamental problems. Investors would do well not to accept such a defence at face value.