After years of bemoaning the negative effects of the strong dollar on their revenue and earnings, US-based multinationals are singing a different tune.
The dollar slumped to five-month lows against major currencies in the first quarter of 2016, as the Federal Reserve turned more cautious on raising rates. The weaker dollar boosted the US export sector’s competitiveness, providing a lift to earnings for numerous companies that sell a significant share of their products overseas.
Pharmaceutical companies Pfizer, Eli Lilly and DuPont have all recently cited the weaker dollar as a reason for increasing their 2016 earnings guidance. And what was expected to be one of the worst quarters for corporate earnings in years turned out to be surprisingly upbeat, with three-quarters of the companies in the Standard & Poor’s 500-stock index beating analysts’ forecasts for the first quarter of 2016, according to FactSet Research Systems.
The US tourism industry also benefits from the weaker dollar. Hotel occupancy rates go up and retail sales as well, particularly at the upper end, as European tourists flock to New York City. The euro rose further against the dollar, even after the European Central Bank cut rates further into negative territory in March.
If the dollar remains weak for a long enough period, it could also encourage more capital investment in the US. Vasileios Gkionakis, global head of currency strategy at UniCredit Research, wrote in a recent report that the dollar “is set for a multiquarter decline, correcting a sizable overshooting.”
Scottsdale, Arizona—based FiREapps, which helps companies manage their foreign exchange exposures, says more than $112 billion in revenue was erased from corporate balance sheets last year as a result of currency headwinds, with nearly $34 billion of the total coming in the fourth quarter of 2015. FiREapps analyzes the quarterly earnings calls of 1,200 publicly traded multinational companies in North America and Europe.
When such powerful headwinds shift to tailwinds, the economy gets a noticeable lift.