U.S. Corporations: Hurt by Currency Fluctuations

U.S. corporations are beginning to complain about the damage that the strong dollar is having on corporate earnings. This morning, United Technologies announced plans to lay off 11,600 workers as a rising dollar and deteriorating economic conditions forces the company to reduce costs. Yesterday, McDonald’s warned that the strength of the dollar and respective weakness in other currencies could decrease first quarter revenue by at least $600 million and earnings by 7 to 9 cents a share. Last week, Burger King Corp and Estee Lauder also announced that their profits dropped as international sales translated into fewer dollars.

A strong dollar is both good and bad, but the bad outweighs on the good especially in the current day and age when U.S. corporations are doing a lot of business abroad.

The impact of currencies on earnings is something we have discussed often on this blog. Imagine that McDonald’s sells Big Macs in the U.K. for 2 British pounds at a GBP/USD exchange rate of 1.80. For U.S. based McDonald’s, that would mean revenue of $3.60 per Big Mac. Suppose that the British pound weakens 20 percent, bringing the GBP/USD exchange rate down to 1.44. The 2 British pounds that they charge for each Big Mac now equals revenue of only $2.88 instead of $3.60. Compound this by millions of Big Macs sold abroad and you understand how a strong dollar hurts companies like McDonald’s.

U.S. Needs a Weak Currency

What the U.S. economy really needs is a weak currency because it will keep demand domestic and help increase the profitability of U.S. corporations doing business abroad. Unfortunately until fear and uncertainty about the financial sector subsides that may not happen anytime soon. In the interim, it is important to realize that the recent strength of the U.S. dollar will contribute to the difficulties plaguing U.S. corporations and because of that, first quarter earnings could take a bigger hit than most investors would expect.

About Kathy Lien 235 Articles

Kathy Lien is an Internationally Published Author and Chief Strategist of DailyFX.com, one of the world’s most popular online websites for currency research. Her trading books include the highly acclaimed, Day Trading the Currency Market: Technical and Fundamental Strategies to Profit form Market Swings (2005, Wiley); High Probability Trading Setups for the Currency Market E-Book (2006, Investopedia); and Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game (2007, Wiley). As Chief Currency Strategist at FXCM, Kathy is responsible for providing research and analysis for DailyFX, the research arm of FXCM. She also co-edits the BK Forex Advisor, an Investopedia.com Premium Service with Boris Schlossberg – one of the few investment advisory letters focusing strictly on the 2 Trillion/day FX market.

Kathy is also one of the authors of Investopedia’s Forex Education section and has written for Tradingmarkets.com, the Asia Times Online, Stocks & Commodities Magazine, MarketWatch, ActiveTrader Magazine, Currency Trader, Futures Magazine and SFO. She is frequently quoted by Bloomberg, Reuters, the Wall street Journal, and the International Herald Tribune and has appeared on CNN, CNBC, CBS and Bloomberg Radio. She has also hosted trader chats on EliteTrader, eSignal and FXStreet, sharing her expertise in both technical and fundamental analysis.

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