Strong dollar creating headwinds to US businesses
October 27, 2022
The US dollar is flying high. For much of the world this is a tragedy, as currencies around the globe depreciate and economies come under strain as a result. But it's not just non-US citizens, businesses and governments that are feeling the pain.
Some American businesses are also feeling headwinds on their revenues from the surging greenback. While American tourists relish their cheap holidays in the UK and Japan, and importers enjoy cheaper goods from abroad, US exporters and businesses with international operations are experiencing losses as their products and services become too expensive for foreign buyers.
"More companies are calling out the strong dollar in their earnings reports," Carla Norfleet Taylor, senior director and head of research of US Corporates at Fitch Ratings, told DW. "There are companies that actually revised their profit guidance now due to currency headwinds."
Third-quarter earnings season has begun and discouraging results from many American businesses are already rearing their heads. With few ends in sight for multiple economic and social crises around the world, and the US Federal Reserve set on continuing its interest rate hikes, the dollar's reign may only get stronger. Some analysts believe the costs to some companies could be in the tens of billions.
Rushing to the safety
The US dollar has surged over 16% in 2022, according to the Wall Street Journal's Dollar Index, which measures the dollar against 16 currencies.
Last week, the Japanese yen fell to a 32-year low against the dollar before the government in Tokyo reportedly intervened to prop up the currency. The British pound sterling also hit historic lows last month, now down 16% year to date (YTD) against the dollar, while the euro tanked over 13% YTD.
The dollar has surged in the past year as multiple global crises and government actions have made the currency attractive to international investors. The dollar is considered a safe haven from financial turbulence. The energy crisis in Europe and Russia's war in Ukraine, as well as an ongoing fear of recession, has pushed investors to scoop up dollars, which tend to fluctuate less than other currencies.
"With weakness across the world investors are looking for someplace safe, someplace defensive," explained Taylor.
The Federal Reserve's aggressive campaign to tame 40-year-high inflation in the US has also played its part. Hiking interest rates puts upward pressure on the dollar as higher yields on bonds and other financial products promise investors greater returns.
What goes around comes around
The dollar's surge has been profoundly damaging to economies around the globe, largely because dollars are a necessity in the global economy. According to the Congressional Research Service, "about half of international trade is invoiced in dollars, and about half of all international loans and global debt securities are denominated in dollars."
As the dollar rises, countries have experienced fiscal strain, capital flight, and weakened growth as imports and debt financing become more expensive for businesses and governments.
But one can't assume that on the other side, all American citizens and businesses are the beneficiaries of the strong dollar. American tourists may be enjoying the most affordable vacations in a quarter century because their cash is worth more abroad, but the flip side of the economic damage in foreign countries is less business for some US companies.
About 30% of US companies' earnings come from outside the country, so many American exporters and companies with an international presence are feeling the pinch from declining foreign demand.
"The strong dollar is weakening demand for US products because our products and services are relatively more expensive than competing domestically produced products, at the same time the economy is slowing down globally," said Taylor.
According to Taylor, some sectors may be impacted by currency headwinds more than others.
A rough start to earnings season
As third-quarter earnings season moves into its second week, companies are already throwing shade on the surging dollar. Already in June, news agency Bloomberg reported that "foreign exchange" was mentioned in earnings calls at a rate not seen since 2019.
US firms like software maker Microsoft, wholesale corporation Costco, and software company Salesforce were among the companies noting currency headwinds hitting profits earlier this year, prompting some to cut their profit forecasts. Companies are already blaming the greenback again this quarter.
While consumer goods company Proctor & Gamble performed better than expected in the third quarter, the company experienced its first annual sales decline in five years, blaming the strong dollar for hitting its sales dramatically. The company has since lowered its annual revenue guidance.
Streaming service Netflix and health care firm Johnson & Johnson also each beat analysts' expectations but the companies similarly noted that currency headwinds ate into their profits. Microsoft saw its slowest growth in five years, with currency fluctuations depressing revenues by $2.3 billion (€2.29 billion).
Taylor would not forecast the currency, but she said: "With interest rates continuing to rise at least through this year, and with inflation and a global slowdown, it seems there's a risk of sustained strengthening in the dollar for a sustained period of time."
Edited by: Uwe Hessler