Rising dollar dents profits

published 29 January 2015

Markets were jittery this week as Greece's new government dug in its heels ahead of negotiations with its creditors. But that wasn't the only problem. On Tuesday the Dow slid by 2% after several US multinationals reported disappointing earnings or outlooks due to the stronger dollar.

Procter & Gamble cited "unprecedented" currency fluctuations as a key cause of a 5% drop in fourth-quarter sales and a 31% drop in profits. Microsoft and United Technologies were further victims. Even Apple's record-breaking results were tarnished by a rising dollar. The greenback has gained almost 18% against a basket of major trading partners' currencies since July 2014.

Moreover, as costs are often denominated in dollars, margins and profits decrease. Future sales and profits may also be lost, as a strong currency makes export-orientated firms less competitive.Foreign sales are worth around half of the S&P 500 firms' overall revenues, and the dollar is now beginning to undermine the expansion in the export-orientated manufacturing sector, judging by the weakness in the latest orders of durable goods, according to Anthony Karydakis of broker Miller Tabak. However, the overall US economy is relatively well insulated, with exports comprising just 15% of GDP.

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Meanwhile, the other main theme of the earnings season the crashing oil price causes damage for oil producers and explorers, said Justin Lahart on wsj.com, but "the net effect of lower gasoline prices on consumers' buying power, while quieter, is strongly positive". Note that consumer confidence has just risen to a seven-year high. While multinationals in the major indices will keep struggling amid ongoing dollar strength, "domestically focused companies should continue to do fine".

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.

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