The rapid appreciation of the US dollar since the start of the year has been a double-edged sword for US multinationals, pushing some of them to decide to hedge or reposition their overseas operations to avoid the fallout.
For an importer, the surge in the greenback against the euro, the yen or the pound sterling is a plus, because it makes the products he buys cheaper.
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But for an American exporting company, products sold in dollars have become more expensive, which increases the risk of losing customers and seeing its sales decline.
And they also lose money when converting foreign income into dollars.
Many companies have already revised their profit forecasts for the year to take into account the changing exchange rate, including IT giant Microsoft, which warned that its quarterly sales would fall by $460 million and its net profit of $250 million due to currency impact.
Adobe, Salesforce, Biogen and Pfizer all warned that the rapidly rising dollar would have a bigger impact on their accounts than expected.
Companies that generate the bulk of their revenue outside the United States are most at risk, starting with tech giants, medical device makers and service companies, according to Kyriba, a data management platform. business cash. Kyriba estimates currency effects could mean a $40 billion drop in profits for S&P 500 companies in the first half of the year.
The Federal Reserve’s decision to aggressively raise interest rates to combat runaway inflation, combined with an influx of funds into the country from investors seeking a safe haven in times of uncertainty, have combined to boost the US dollar.
The greenback has risen 13% against the euro over the past 12 months, approaching parity, and gained 22% against the yen.
“In the short term, this is good for the United States because it means all imports are cheaper and it puts downward pressure on inflation,” said Desmond Lachman of the think tank American Enterprise. Institute.
But further out, the effect on the US economy is more nuanced, because if exports fall, “the US trade deficit widens and then we get more foreign debt.” But the multinationals “don’t have control over these big items,” he explained.
They can, however, mitigate the effect of fluctuations in the foreign currencies in which they price and invoice the goods by adopting hedging strategies – using financial instruments that offer a kind of insurance against losses caused by changes in the exchange rate.
Most companies already have hedging programs in place and change their plans quarterly or even monthly, sometimes trying to predict currency movements, Kyriba’s Bob Stark said.
But that’s not an exact science, he noted, especially at a time of great uncertainty about the direction of inflation, interest rates and the possibility of a recession.
But “since the pandemic began, CFOs have become very good at looking at multiple scenarios and building on them,” Stark said.
Sporting goods giant Nike, for example, warned on Monday that currency effects would reduce annual revenue by several percentage points. But the profit received is much lower due to hedging.
The current high volatility in the foreign exchange markets also means that hedging costs more, so some companies choose not to use these instruments.
Among the other tools at their disposal, multinationals can reduce their exposure through other techniques, such as paying their Japanese suppliers in dollars, renegotiating prices, or buying their supplies in different countries. Or they can simply wait for the US currency to weaken before repatriating their profits.
However, once the exchange rate has strengthened, room to maneuver is limited, according to Nikolai Roussanov, professor of finance at the University of Pennsylvania, especially when prices also rise due to chain issues. energy supply and costs.