A Strong Dollar Is Wall Street’s Newest Scapegoat for the Drag on Profits

Since the Chinese Communist Party cracked down on Chinese stocks, the capital fleeing China has accelerated. This photo shows a bank teller counting stacks of US dollars and Chinese 100-yuan notes at a bank in Hefei, Anhui province, China. (STR/AFP/Getty Images)

Leaders on Wall Street are beginning to complain on their corporate earnings calls about the strong U.S. dollar being a drag on profits, especially regarding foreign markets.

The U.S. dollar has made gains against many of the major global currencies over the last few months, and is hitting its highest level since 2020 as the Federal Reserve announced further interest rate hikes.

The dollar is now up 11 percent versus the euro, with the exchange rate between the two currencies hitting parity for the first time in two decades.

It is also up 13 percent against the British pound, 20 percent against the Japanese yen, and 6 percent against the Chinese renminbi.

The hike in the Fed’s policy rates are partially responsible for the rising value of the dollar, while currency traders are seeking safety in U.S. currency and assets at a time of geopolitical instability.

The strong dollar has benefitted many people using the currency, like American tourists shopping in Europe and those importing foreign goods.

However, this does tend to weigh on U.S. corporate earnings, especially at firms that have a strong business presence overseas, as an 8–10 percent increase in the value of the dollar could lead to a 1 percent drop in profit margins, according to Credit Suisse Group AG.

A strong dollar also makes American manufactured goods more expensive overseas, forcing foreign buyers to pay more in local currency to purchase those same items and lessening the value of foreign revenue for American companies when it is converted into U.S. currency.

The revenue earnings of foreign companies in America, on the other hand, grow stronger once the higher value greenbacks are converted to a local currency.

On July 20, Johnson & Johnson slashed its full-year profit estimates after reporting that a stronger dollar might cut into its overseas sales.

“As we always do, let me give you a sense of the impact currency may have on potential full year reported results, specifically the strengthening U.S. dollar,” the company said in an earnings call.

“There is an incremental unfavorable currency impact of $1.5 billion on reported sales and an unfavorable $0.20 impact for the estimated reported adjusted earnings per share versus the projection utilized in April’s guidance.”

3-Year High

Analysts at Bloomberg have noticed that references to “foreign exchange” in earnings calls have hit a three-year high in the second and third quarters.

“Given the focus on the sharply strengthening dollar, I'll mention that currency translation impacted our reported revenue by over six points of growth or $900 million,” said IBM’s CFO Jim Kavanaugh in a call to shareholders.

“That’s over $200 million more than the spot rates would have suggested 90 days ago.”

IBM on July 18 said that it expects the rising dollar to erase $3.5 billion from its 2022 corporate annual earnings, sending shares to fall 6.9 percent in morning trading on July 19.

Hasbro, the toy making giant that relies heavily on the export market, is reporting millions in losses this year due to the currency shift.

“For the first time in 20 years, the euro and the U.S. dollar are now at parity. And the euro is our largest international currency,” Hasbro said in its corporate earnings note.

“If we look at the back half of our year, we expect this to have an additional negative impact to CP revenue of $30 million to $40 million versus our expectations as we enter the year. Given hedges we have in place, we expect less of an impact to operating profit.”

The rising price of U.S. made goods has lead to a decline in demand and making American manufacturers less competitive, as foreign importers look to alternative sources of goods.

“The strong dollar is an issue for companies because it makes U.S. products less attractive to foreign buyers,” said Jonathan Golub, chief U.S. equity strategist at Credit Suisse Securities to Bloomberg, “and when you translate those earnings back to dollars, you get lower numbers.”

Caught Off-Guard

Several American companies are now considering cuts in order to stay competitive and preserve their corporate margins.

Most U.S. firms protect their earnings from volatility in global monetary markets by purchasing items like currency swap forward contracts to exchange currency at a fixed rate. But the rapid rise in the dollar has put many of them off-guard.

Companies more dependent on overseas sales have taken a massive hit to their bottom lines.

The largest U.S. tech firms are the most vulnerable to a change in conversion rate, as they do much of their business overseas, generating 60 percent of their revenue and a third of their sales in foreign markets.

While the rising dollar has caused pain to the stock price of many American firms, market watchers are beginning to warn about its impact on corporate debt as well.

Other American firms, according to Credit Suisse, actually stand to benefit from dollar appreciation, like those with domestic sales and foreign currency costs who are now outperforming their suffering rivals.

In the meantime, many foreign companies doing business in the United States are benefitting from the strong dollar, as their products are now cheaper to import into the country.