US multinational corporations struggling with rising dollar
The quick rise in the value of the US dollar since the beginning of the year is a double-edged sword for American multinational corporations.
The quick rise in the value of the US dollar since the beginning of the year is a double-edged sword for American multinational corporations, forcing them to determine whether to hedge or move their operations abroad to prevent damage.
The rise in the value of the dollar versus the Euro, Yen, or British pound is beneficial to importers since it lowers the cost of the goods they buy.
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However, for a US export firm, supplying products in the dollar has grown more expensive, increasing the risk of customer loss and sales reduction. Foreign earnings are also lost when converted to USD.
Many companies have already changed their profits predictions for the year to account for the shifting exchange rate, including computer behemoth Microsoft, which warned that the currency blow will reduce quarterly sales by $460 million and net profit by $250 million.
Adobe, Salesforce, Biogen, and Pfizer have all cautioned that the dollar's quick climb will have a higher than expected impact on their accounts.
According to Kyriba, a corporate cash management platform, organizations that derive the majority of their income outside of the US are the most vulnerable. These include IT behemoths, medical equipment manufacturers, and service providers.
According to Kyriba, currency shocks might cost S&P 500 companies $40 billion in earnings in the first half of the year.
The Federal Reserve's decision to rapidly raise interest rates in order to battle excessive inflation, together with an infusion of capital into the nation from investors seeking a safe haven in uncertain times, have all contributed to a rise in the value of the US dollar.
Over the previous year, the dollar has surged 13% versus the euro, reaching parity, and 22% against the yen.
Desmond Lachman, of the American Enterprise Institute thinktank, stated that "short term, that's a good thing for the United States because it means all the imports are cheaper and it puts downward pressure on inflation."
However, global corporations "don't have control over these big items," he noted.
They can, however, limit the impact of changes in foreign currencies in which they price and invoice products by using hedging methods, which involve the use of financial instruments that provide a type of insurance against losses caused by fluctuating exchange rates.
According to Kyriba's Bob Stark, most firms already have hedging strategies in place and adjust their plans on a quarterly or even monthly basis, sometimes attempting to foresee currency changes.
However, he warned that it is not a precise science, particularly at a time of high uncertainty about the path of inflation, interest rates, and the prospect of a recession.
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Stark said that since the beginning of the pandemic, "CFOs have gotten very good at looking at multiple scenarios and building on them."
Nike, for example, warned on Monday that currency effects would reduce yearly revenue by several percentage points. However, due to hedging, the earnings hit is significantly lesser.
Because of the present high volatility in foreign currency markets, it is more expensive to hedge, hence some corporations choose not to employ those products.
Among the numerous alternatives at their disposal, global corporations can decrease their risk by paying their Japanese suppliers in dollars, renegotiating pricing, or even purchasing goods from different countries.
Alternatively, they might simply wait for the US dollar to weaken before repatriating their gains.
However, once the currency has risen in value, there is little space for maneuver, according to Nikolai Roussanov, a finance professor at the University of Pennsylvania, especially when prices are also rising due to supply chain concerns and rising energy costs.
He told AFP that "if you try to react to something already happening, it might come to bite you later because some of these movements are quite transitory."