As corporate guidance goes, it was not the most upbeat news ever.
In conference calls in January and February, executives from a wide range of US corporations—from Internet giant eBay to toothpaste maker Procter & Gamble—said they were lowering earnings expectations for 2015. Most CFOs laid a good deal of the blame on the strong dollar, now at a 12-year high, which they expect to eat into export revenues. That, presumably, will smack profits.
But it isn’t necessarily so. While US exporters will get hit when converting foreign sales into greenbacks, the pinch may not be as bad as expected. The track record indicates American businesses have often made out just fine despite a lopsided exchange rate. In the late 1990s, the dollar was extremely strong versus the yen and other major currencies. GDP growth in the United States that year was 4.5%. “The U.S. dollar would have to appreciate considerably before it will effect growth,” says Dean Popplewell, vice president of currency analysis and research at OANDA.
Granted, the early returns haven’t been all that encouraging. Pfizer CFO Frank D’Amelio noted that the strengthening greenback knocked down the health sciences company’s adjusted net income by 3% in Q4. Meanwhile, retailer Home Depot indicated in February that the current exchange rate would shave off a billion dollars in revenues this year—assuming the rate remains the same.
There’s the rub. Predicting currency fluctuations is a tricky business. Finance managers at Honeywell International and 3M Company correctly anticipated the recent decline in major world currencies and set up currency hedges. But scores of companies were caught unawares by the rise of the dollar. They could be wrong again. Indeed, the dollar rally started to show some signs in mid-March of losing a bit of steam.
What’s more, a stronger greenback makes for cheaper inbound materials for US companies. Census Department data showed the value of imported industrial supplies dropped by $6 billion in January. And yet another knock-on effect: The plunge in the price of oil has plumped up consumers’ wallet. Sales from the found money, Popplewell notes, have yet to show up on corporate financial statements—but will soon.