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A Strong Dollar Is a Major Headwind to US Corporations Operating Abroad

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This earnings season, the relative position of the dollar is a drain on international profits for many companies.

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MINYANVILLE ORIGINAL It might seem like a great thing to lots of people: A "strong" dollar. Makes it sound like our country and our economy are winning fights with polar bears or something. But in reality, the manufacturing sector -- a major driver of the economic recovery -- is suffering because of it. And this is being reflected in company earnings statements.

Last year, the US exported $1.299 trillion worth of domestic merchandise, up from $1.122 trillion the year before. So far, the US exports are on a quicker pace than last year, according to the US International Trade Commission. Granted, America's trade deficit with the rest of the world is absolutely massive, but exports strongly support manufacturing, as well as other industries.

This chart shows an inverse relationship between the ISM export manufacturing sector and the US Dollar Index (^DXY), as measured against a basket of other currencies. Basically, when the dollar becomes more expensive, relatively, competing products from other countries become cheaper. The same is true at home. Products from abroad will be priced cheaper in dollars when the dollar is strong, leading consumers and businesses to choose imports.

ISM Manufacturing Exports Index Chart

ISM Manufacturing Exports Index data by YCharts


In this chart, you can see the dollar climbing through 2012, mainly against the battered euro.

More export-oriented economies such as Japan are very familiar with this situation. Toyota's (TM) revenues are basically a reflection of the US dollar to yen ratio. Toyota has recently put more factories in North America to mitigate this.

Here is the same chart spread over 10 years, showing an even stronger inverse relationship between US exports and the strength of the dollar.

ISM Manufacturing Exports Index Chart

ISM Manufacturing Exports Index data by YCharts


The US ITC shows that heavy industry, especially transportation equipment such as automobiles and airplanes, leads US export goods. Certainly, Ford (F) was hit disproportionately by the unfavorable conditions in Europe. With over $2 billion in profit from its North American operations, it lost $404 million in Europe and $66 million in Asia. Though the spreading recession in Europe is partly to blame, potential buyers might have been put off by Ford's relatively uncompetitive pricing.

Chemicals are also a big export. E.I. dupont de Nemeurs (DD), which produces chemicals, among other things, reported that the strong dollar was a major headwind in the second quarter, shaving 3% off of the company's top line. For the year, the dollar's strength will reduce the company's per-share profit by $0.35, according to company executives.

The strong dollar also impacts lighter manufacturing and the services industry. Even McDonald's (MCD), the seemingly quintessential American company whose biggest market is in Europe, had earnings that were lower in the second quarter by $0.07 per share. As for Pepsico (PEP), executives at the company said that the "negative impact of translating [their] international revenues with the strengthened dollar in Q2" and losses in revenue in franchises and bottlers in China and Mexico wore on growth.

As a flip side to having international profits cut down, a strong dollar does make it easier to invest overseas. This was true of Japanese companies in this environment in which the yen is historically high. Last year, Japanese conglomerates used the favorable currency exchange to make acquisitions. United Parcel Service (UPS) embodies the two-edged sword of a strong dollar since it is in the process of acquiring TNT Express, a major European competitor in a $6.5 billion deal. UPS is in for a bargain if the euro continues to fall in the process of the deal. As Kurt P. Kuehn, UPS's CFO, said on the most recent earnings call (emphasis my own):

It is a turbulent period for currency. And although it's funny with us moving towards the TNT closure, we're not sure which way to vote for the euro, frankly. It had a very significant impact on revenue. If you look at -- without currency adjustment, our yields in International were down 2.5%. But if you look on our Web schedules at the next page, it shows that if you currency adjust, they were up 2.1%. So that's almost 4.5% impact of currency on our International revenues, and that doesn't include anything on the Supply Chain & Freight. So it is a turbulent period, creating some challenges for year-over-year comps and also for profit planning. We do have some hedges in place that are helping to mitigate the P&L impact, and currency was just a minor negative in the quarter and, frankly, was more or less offset by a slight positive on fuel. So it has not been a big deal so far, although clearly, over the time, as -- if euro stays very low, then there will be some earnings translation impact. On the flip side, we do have a pretty big check to write to complete the TNT acquisition, and a low euro clearly makes that much less expensive in dollar terms, and a low euro clearly makes that much less expensive in dollar terms.

Twitter: @vincent_trivett
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