'Strongest Dollar in 20 Years' Impact of Gangdollar on US Companies

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] As the value of the US dollar hits its highest level in over 20 years and the strong dollar trend continues, global companies are moving busily. US companies with a high proportion of overseas sales inevitably face a hit to their earnings, and urgent changes in hedging strategies to minimize this impact are required.

According to the Wall Street Journal (WSJ) and others on the 25th (local time), the dollar index has risen more than 10% since the beginning of this year. On the 14th, the dollar index surpassed 108.5, marking the highest level in 20 years since October 2002. Since then, the dollar index has slightly dropped and is currently maintaining around 106. Along with the rise in the dollar’s value, the Japanese yen and the European euro have plummeted.

When the dollar is this strong, US companies inevitably suffer revenue hits. With the US Federal Reserve (Fed) expected to take another giant step (a 0.75 percentage point increase in the benchmark interest rate) on the 26th, the strong dollar trend is expected to continue for the time being. If the dollar remains strong, US companies operating overseas will see the value of their overseas sales decline and face operational difficulties due to reduced competitiveness compared to local competitors.

In fact, a foreign media outlet reported that US companies’ sales volume decreased by billions of dollars in the second quarter this year due to the strong dollar. On the 18th, IBM announced its second-quarter earnings and forecasted foreign exchange losses of $3.5 billion (about 4.6 trillion KRW) this year due to the strong dollar. James Kavanaugh, IBM’s Chief Financial Officer (CFO), said, "The pace of dollar appreciation is the fastest we have seen in the past decade," adding, "More than half of all currencies we hedge against the dollar have declined by double digits. This is an unprecedented level."

Johnson & Johnson also lowered its earnings guidance, stating that sales could decrease by $4 billion this year due to exchange rate effects. Philip Morris and Netflix also assessed that they suffered hits of $500 million and $339 million, respectively, in the second quarter due to the strong dollar. Jonathan Golub, Credit Suisse’s US equity strategist, expects S&P 500 companies’ second-quarter earnings to increase by 10% year-over-year, but without the strong dollar issue, the increase would have been 12%. He analyzed that if the dollar index rises by 8-10%, S&P 500 earnings would decrease by about 1%.

Amol Argalkar, chairman of financial consulting firm Chatham Financial, said, "Companies are being forced to reconsider how to manage their currency hedging programs due to the strong dollar," adding, "Even if they are currently benefiting from the current exchange rate situation, this will not last forever, and discussions need to be revisited."

Companies mainly use futures contracts and options to hedge exchange rate volatility when converting overseas earnings into dollars. In a situation where the US benchmark interest rate is rising faster than in Europe or Japan, Flavio Figueiredo, global head at Citibank, analyzed that it is advantageous for US companies to hedge exchange rates through futures trading in countries with lower interest rates than the US.

WSJ reported that some banks are reviewing the exposure of some global companies to the foreign exchange market and whether to adjust their foreign exchange hedging ratios accordingly. Armit Shinji, CFO of Levi’s, famous for its jeans, said, "We are reviewing hedging methods that can mitigate the impact of the strong dollar on earnings," and Edmund Lees, CFO of Broadridge Financial Solutions, said that the bond team is continuously in contact with banks to reduce the impact of exchange rate risks.

This content was produced with the assistance of AI translation services.