This earnings season, corporations are paying attention to the U.S. dollar
This earnings season, corporations are paying attention to the U.S. dollar
We’re going to be hearing from a big list of U.S. companies this week about how they did in the most recent quarter, including 3M, Coca-Cola, Tesla and IBM.
Analysts will be focusing a lot of attention on those companies’ sales and whether consumer spending is continuing to stay strong. But another theme that could come up in earnings reports this week is the value of the U.S. dollar, and the impact it’s having on companies’ profits.
Late last week, Procter and Gamble reported that it’s more optimistic about foreign exchange than it was earlier in the year. The dollar’s decline in value could be helping out lots of companies in the near future.
Companies care about the dollar’s value because when it rises, it affects their sales overseas.
“Ultimately, a strong dollar makes that weak in terms of revenue,” said Dan Ives, managing director with Wedbush Securities.
He said those companies have to bring that revenue back home. And if the dollar is strong, those foreign sales just don’t go as far back in the U.S.
“That’s something that ultimately becomes a headwind for companies with a stronger dollar,” Ives said.
The dollar’s value shot up back when the Federal Reserve started raising interest rates in 2022. Back then, the U.S. economy was hot, and foreign investors were piling in to government bonds, which you need dollars to buy.
But Nick Bennenbroek, international economist with Wells Fargo, said now, “We’re seeing somewhat slower job growth, somewhat slower economic growth. And the U.S. interest rates have started to come down. So, with all of that, we’ve started to see a gradual decline in the U.S. dollar at this point.”
That doesn’t necessarily mean that the dollar’s value will plummet. Chris Vecchio, head of futures and Forex with the research company TastyLive, said remember: the Federal Reserve isn’t the only central bank cutting rates.
There’s the European Central Bank, “the Bank of England, the Bank of Canada, the Reserve Bank of New Zealand, all moving in lockstep in the Federal Reserve that has begun its rate cut cycle,” Vecchio said. “That probably means you’re probably not going to see one currency, the dollar or otherwise, gain too much ground versus its peers.”
Instead, Vecchio said the dollar’s value will likely stabilize in the coming year, which can give companies a better sense of what to expect.
“Having the confidence in where exchange rates are going allows a company to project its earnings a little bit more confidently into the near-term future,” Vecchio said.
And at a time when the economy can feel uncertain, having that confidence can be pretty helpful.
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