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Dollar Strength is Bruising America’s Global Companies

  • The soaring dollar has made it far more challenging for analysts to discern if U.S. companies were displaying evidence of a slowing U.S. economy, as high inflation and tighter monetary policy weigh on business and consumer demand.
  • Snapshot economic data already signal a pullback in activity as consumers cut spending with inflation eating into their purchasing power.

It’s all fun and games until it’s time to collect and more of America’s biggest firms are realizing that collecting from offshore customers is thinning out against the backdrop of a strengthening dollar.

Billions of dollars of second quarter sales have been wiped off U.S. companies, with many cutting of America’s biggest brands, including IBM (+0.23%), Johnson & Johnson (+0.20%) and Philip Morris (-0.094%) cutting guidance for the rest of the year.

Apple (-0.74%) and Microsoft (-0.59%), which report their quarterly earnings in the coming weeks, and generate a substantial portion of their earnings outside of the U.S., are expected to join a growing list of American companies issuing forward guidance on earnings.

The soaring dollar has made it far more challenging for analysts to discern if U.S. companies were displaying evidence of a slowing U.S. economy, as high inflation and tighter monetary policy weigh on business and consumer demand.

Snapshot economic data already signal a pullback in activity as consumers cut spending with inflation eating into their purchasing power.

With the U.S. Federal Reserve largely expected to raise borrowing costs by a further 0.75% this week and tighten policy to restrain demand, the Fed’s monetary policy is in stark contrast to that of the European Central Bank and the Bank of Kapan, which have been far more restrained in their efforts to combat inflation.

The ECB recently raised interest rates by 0.50% for the first time in over a decade and its highest rate hike in over twenty years, while the BoJ has kept borrowing costs at rock bottom, which has sent the euro and yen plummeting against the dollar.

Under normal economic conditions, the yen and the euro have helped to temper some of the dollar’s rise as Europe and Japan pursued negative rates to prevent their currencies from rising too quickly in order to facilitate their export-oriented economies.

However, rapidly rising interest rates in the U.S. mean that the dollar is now heads and shoulders above the euro and yen, which hurts some of the biggest customers for American products overseas.

Last week, IBM warned that the strengthening dollar could reduce this year’s revenues by a whopping US$3.5 billion, while Johnson & Johnson, the consumer goods giant, warned of a US$4 billion drop in sales this year.

Cigarette giant Philip Morris saw a US$500 million drag on earnings because a strengthening dollar would make some of its most popular Marlboro cigarette products more expensive for export markets.

Efforts to hedge foreign exchange risk has also been futile, given the relentless ascent of the dollar.

But of all the sectors susceptible to an ascendant dollar, tech seems particularly vulnerable, with Goldman Sachs estimating that a whopping 59% of sales for tech companies listed on the S&P 500 coming from outside the United States, far above the average for the index.

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