Strong US Dollar Will Rev Up Global Mergers, Acquisitions

One dollar banknotes in front of displayed stock graph on Feb. 8, 2021. Dado Ruvic/Reuters

Commentary

Relative strength of the U.S. dollar is expected to continue, propelled by the Federal Reserve’s determination to combat inflation by tightening monetary policy.

The dollar’s strength has been a headache for U.S. multinational corporations, whose revenues earned in other countries are worth less in dollar terms after currency translation. U.S. companies report earnings in the local currency.

But this dynamic has also created a unique opportunity. Like U.S. vacationers landing in Europe suddenly armed with more purchase power, overseas companies now look mighty cheap to U.S. companies looking to make acquisitions.

The dollar has risen around 20 percent year-to-date against the British pound (GBP). It is up around 16 percent against the euro (EUR), and its nearly 30 percent gain against the Japanese yen (JPY) is even more pronounced. This means any acquisition in those markets is suddenly massively discounted compared to the beginning of the year—everything else being equal.

Traders expect this foreign exchange trend to continue. According to data from the U.S. Commodity Futures Trading Commission, investors are placing more wagers on the U.S. dollar to make advances against currencies such as the yen, the euro, and the Canadian dollar.

It is happening despite the Fed having already raised interest rates by 75 basis points (1 basis point = 0.01 percent) at each of its past three meetings. This is mainly due to the central banks in other countries enacting somewhat different mandates. Bank of Japan isn’t budging on keeping Japanese rates below zero, the People’s Bank of China is looking to cut rates as the country’s economy deteriorates, while both the Bank of England and the European Central Bank are tightening policy, albeit at a much slower pace than the Fed.

‘Haven’ Asset

The U.S. dollar is further boosted by its status as a “haven” asset during times of distress, with global investors pouring into U.S. assets due to America’s relative economic stability.

This has created a divergency across global interest rates after more than a decade of lockstep rate cuts.

With this fact pattern established, it’s no wonder that U.S. firms are gearing up to spend.

“Everything in the UK is on sale,” declared Blair Jacobson, co-head of European credit at U.S. private equity giant Ares Management, in a Financial Times event in London on Oct. 12.