Dollar Traps US Businesses in $4 Trillion Stress Test

US one dollar banknotes are seen in front of the stock market graph displayed in this illustration taken February 8, 2021. REUTERS/Dado Ruvic/Illustration

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NEW YORK, July 29 (Reuters Breakingviews) – The strength of the dollar is becoming a test of nerves for global businesses. From drugmaker Pfizer (PFE.N) to iPhone peddler Apple (AAPL.O) and shrewd online marketplace Etsy (ETSY.O), executives say the rise in the U.S. currency to levels not seen since almost 20 years reduced their profits. Dismal profits could be expected from companies that sell American products abroad. But weigh the pros and cons, and the Teflon dollar is still in America’s interest.

The dollar has strengthened by more than 15% in one year against an index that includes the yen, pound, Canadian dollar, euro, Swiss franc and Swedish krona – the fastest rate of increase rapid since 2015. On the one hand, the Federal Reserve’s aggressive interest rate hikes, including Wednesday’s 75 basis point hike, have made investing in dollars more attractive. And when investors fear disease or world war, as they do now, they tend to seek deep, liquid markets. For those, the United States remains unparalleled.

The resulting surge in the greenback is great for American vacationers abroad, but painful for American businesses with foreign cash flow. According to Morgan Stanley, approximately 30% of the revenues of companies in the S&P 500 index come from outside the United States. That equates to around $4 trillion, according to Refinitiv estimates for this year. Earnings estimates tend to fall as the dollar rises.

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The S&P 500 estimates EPS downgrades as a share of all revisions.

Too much force for too long could be a problem. Companies that depend on profits abroad have less to invest once they’ve scooped up the spoils at home. They are also encouraged to relocate production to less expensive countries. This, however, looks less risky when some of the dollar’s outperformance stems from abundant risks elsewhere. The fall of the euro does not reflect an investment opportunity but a region in turmoil, partly due to soaring energy costs.

This makes the strong dollar a stock market problem for now. Federal Reserve chief Jay Powell, for example, isn’t fazed by falling stock markets. President Joe Biden has remained silent on the monetary issue, while Treasury Secretary Janet Yellen said the rising dollar was “understandable”. A tendency to stay out of the currency markets and a historic White House preference for a strong dollar is another reason the United States retains its appeal for global investments.

In any case, what companies lose today, they are likely to regain tomorrow. Markets are already pricing in rate cuts in early 2023, suggesting inflation will be under control by then. When this happens, investors are likely to regain their appetite for risk and buy back stocks. Companies now singing the strong dollar blues could change their tune before long.

(The author is a Reuters Breakingviews columnist. Opinions expressed are his own)

Follow @johnsfoley on Twitter

BACKGROUND NEWS

The US dollar has strengthened 15% over the past year against a basket of trading partner currencies, as of July 29. The US Dollar Index tracks the currency against the Euro, Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc.

The dollar’s annual rate of change over the period since April is the fastest rise since September 2015, according to Datastream.

Many global companies have warned that currency movements will reduce their revenues and profits. Apple said on July 29 that the exchange erased 300 basis points from its revenue for the quarter ending in June.

Drugmaker Pfizer warned a day earlier that the strengthening dollar would cut its revenue for the year by about $2 billion. And Etsy, the online marketplace, told analysts on July 27 that currency movements would reduce “several percentage points” in the value of goods sold on its platforms.

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Editing by Lauren Silva Laughlin and Amanda Gomez

Our standards: The Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and non-partisanship by principles of trust.

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