New York: The US dollar surge since the beginning of the year is a double-edged sword for American multinationals, urging some to decide whether to hedge or relocate their overseas activities to avoid fallout. I am. For importers, the surge in greenbacks against the euro, yen and pound sterling is a plus as it makes the products they buy cheaper.
However, for US exporters, products sold in dollars are more expensive, and there is an increased risk of losing customers and reducing sales. You also lose money when you return foreign income to dollars. Many companies have already revised their earnings forecasts this year to account for changes in exchange rates. This includes computing giant Microsoft, which warned that a currency blow would reduce quarterly sales by $ 460 million and net income by $ 250 million. Adobe, Salesforce, Biogen, and Pfizer all warn that a surge in the dollar will have a bigger impact on accounts than expected.
$ 40 billion hit
According to Kyriba, a company’s cash management platform, the companies that generate the most revenue outside the United States are the most exposed, including tech giants, medical device makers, and service companies. Kiriba estimates that the impact of the currency could hit S & P 500 companies’ earnings by $ 40 billion in the first half of this year.
The Federal Reserve’s decision to aggressively raise interest rates to combat sharp inflation, coupled with the influx of money from investors looking for safe haven in uncertain times into the country, will push the US dollar up. became. Greenbacks have risen 13% compared to the euro over the past 12 months, approaching equality and rising 22% against the yen.
“In the short term, that’s good for the United States because it means that all imports are cheaper and put downward pressure on inflation,” said Desmond Luckman, a think tank at the American Enterprise Institute. .. But for that matter, the impact on the US economy is more subtle, as exports decline, “the US trade deficit widens and external debt rises.” But multinationals “can’t manage these big items,” he explained.
However, by adopting a hedging strategy that uses financial products that provide a type of insurance against losses due to exchange rate fluctuations, you can mitigate the effects of fluctuations in foreign currencies that are priced and billed for the products. According to Bob Stark of Kiriba, most companies already have hedging programs in place and may even change their plans quarterly or monthly to try to predict currency movements. But that is not an accurate science, he pointed out, especially in times of great uncertainty about the direction of inflation, interest rates, and the potential for recession.
Change countries to reduce costs
But “since the pandemic began, CFOs have been very good at considering and building on multiple scenarios,” Stark said. For example, sporting goods giant Nike warned that the currency would reduce annual earnings by a few percent. However, because of hedging, the profit impact is much lower. The current high volatility of the forex market also means that hedging will cost more, so some companies are choosing not to use those products.
Among other free tools, multinationals can reduce their exposure in other ways, such as paying Japanese suppliers in dollars, renegotiating prices, or purchasing supplies from different countries. increase. Alternatively, you can simply wait for the US currency to depreciate before sending the profits back home.
However, according to Nikolai Rusanov, a professor of finance at the University of Pennsylvania, there is limited room to maneuver when exchange rates rise, especially when prices are rising due to supply chain problems and energy costs. “When trying to react to what’s already happening, some of these movements are so temporary that they can bite later,” he said. – AFP