A strong dollar, a problem for companies doing business abroad

Excess inventory isn’t the only issue causing revenue warnings. Consumer spending is falling — and then there’s the strong dollar. Compared to a basket of other currencies, the greenback has gained 14% over the past year. This was recently cited as a drag on profits by Microsoft and Salesforce.

The dollar had been strengthening for most of the past year, but it really took off a few months ago, according to Harvard economics professor Kenneth Rogoff.

“Now that the Federal Reserve is raising interest rates, the dollar has risen sharply,” he said.

Higher interest rates made US Treasury bonds more attractive. And to buy US Treasury bonds, you have to have dollars. “You don’t get that to the same degree on the euro, the pound or the yen, and so money flows to the United States, and that pushes the dollar up,” Rogoff said.

That’s great for Americans who want to buy foreign products, but not so great for American companies that sell products in other countries.

“This stronger dollar makes the products of our American companies more expensive overseas,” said Colin Gillis, director of research at Chatham Road Partners.

American multinationals derive an increasing share of their income from abroad, said Teresa Fort, a professor at Dartmouth College.

“And the fact that a lot of these big companies are upset about the strengthening dollar kind of shows us how important those overseas sales are,” she said.

Fort researched American manufacturers who manufacture and sell products in the United States and abroad. “The sales of their overseas affiliates are three-quarters the size of all of their establishments’ sales in the United States, so they’re almost the same size.

The dollar won’t stay this strong forever. Other central banks are starting to do what the Federal Reserve is doing, said Jay Bryson, chief economist at Wells Fargo.

“I mean, if you look at the European Central Bank – you know, earlier this year, nobody really thought the ECB would raise rates this year. Now it looks like it’s an early conclusion that’s going to happen.

And there are also many signs that inflation in the United States could slow, said Chuck Tomes of Manulife Investment Management.

And if it continues? “It wouldn’t surprise us to see the Fed perhaps not making as many hikes, rather than more hikes,” Tomes said.

And that could help bring the dollar back to earth.

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