The US dollar has climbed some 25% since June to its highest level in the past 12 years, which could have a significant impact on one of America’s biggest economic drivers: foreign direct investment.
The United States has been the largest market for incoming flows—with $188 billion in 2013 alone, according to World Investment Report 2014. The stronger US dollar, however, might reverse this trend as it increases corporate valuations and makes potential deals less attractive by comparison with other markets.
Of course, there are two sides to the coin. “There will be some businesses that will see this as an opportunity to buy euro-based businesses at relatively cheaper entry prices,” says Mitchell Presser, head of the US M&A practice at international law firm Freshfields, while inbound US transactions “get harder because people will view the dollar as expensive.”
Low US energy prices, on the other hand, make manufacturers and distressed energy companies financially more appealing. But the long-term effect of a stronger dollar is unclear. “Ultimately, companies [considering a merger or acquisition] will focus on long-term fit, and exchange rates at a given moment should not be the biggest driving factor,” says Presser.
Currency volatility affects pending and future transactions in the real estate space as well. “We are starting to see some impact from the strengthening dollar,” confirms Bill Shanahan, vice chairman at CBRE, a global real estate services company, “particularly on the South American investor. Our level of inquiry from that region has slowed markedly in response to the currency impact.”
But Chinese interest in significant real estate projects in the US, such as Atlantic Yards in New York, continues. “Equity inflows from China remain strong, and expectations are that 2015 inflows will exceed 2014 inflows,” says Shanahan.
Thilo Hanemann and Cassie Gao of Rhodium Group confirm this trend more broadly in their recent update on Chinese FDI—citing that Chinese investment over the past 12 months in the US totaled $12 billion, topping the $10 billion mark for the second year in a row, and the number of M&A transactions reached a new all-time high in 2014.