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New York (AFP) – The rapid rise in the value of the dollar since the beginning of the year has two faces for American multinational companies, which are seeking to limit the repercussions of this phenomenon.
For an import company, a rise in the US currency against the euro, yen or British pound is an opportunity because the products you buy are cheaper.
But for a US export company, dollar-delivered products are more expensive, with the risk of losing customers. This does not account for the loss in the value of income earned abroad when it is converted into dollars.
Several companies have already revised their annual forecasts, such as the computer giant Microsoft, which has warned that its quarterly sales will fall by $460 million and that its net profit will suffer a drop of $250 million due to the exchange rate impact.
Adobe, Salesforce, Biogen and Pfizer have all warned that the rapid rise in the dollar’s value at the start of the year will have a larger-than-expected impact on their balance sheets.
Logically, the companies with the greatest exposure are those that receive most of their income outside the United States, ranging from tech giants, medical equipment manufacturers and service companies, according to Kyriba, a corporate liquidity management platform.
Kyriba expects the effects of the currency to affect S&P 500 companies on Wall Street by as much as $40 billion in the first half.
The strong rise in interest rates decided by the US Central Bank (the Federal Reserve, Federal Reserve) to combat inflation, along with the influx of investors into the US in search of safe spots in times of uncertainty, strengthened the dollar.
The dollar has risen by 13% against the euro in the past 12 months, bringing it close to parity with the European currency, and against the yen the dollar has appreciated by 22%.
“In the short term, this is good news for the United States because this makes imports less expensive, and thus can curb inflation,” said Desmond Lachman of the American Enterprise Institute.
In the medium term, the impact on the US economy is more bleak because if exports decline “it will increase the US trade deficit.”
The expert explained that multinational companies “do not have effective control” of these elements.
However, companies can mitigate the impact of foreign currency fluctuations on their prices and bills by adopting hedging tools.
Bob Stark of Kiriba explained that most multinational companies adopt these mechanisms to try to predict the evolution of prices.
Stark acknowledges that it’s not an exact science, especially in a period of high uncertainty about inflation, interest rates, or the possibility of a recession, among other things.
“Since the start of the pandemic, CFOs have gotten much better at assessing and acting upon multiple scenarios,” Stark said. “If the impact of different scenarios on cash flow forecasts can be assessed, then better decisions can be made.”
Sports equipment company Nike, for example, warned on Monday that the effects of the currency would reduce its annual bills by several percentage points.
The current high volatility of currencies also means that hedging against the effects of foreign exchange is becoming increasingly expensive. Some companies choose not to protect themselves so as not to pay the premiums.
Among the other tools at their disposal, multinational companies can also reduce their exposure by adjusting their practices: paying their Japanese suppliers in dollars, for example, renegotiating prices, and even changing countries to source.
They can also wait for the dollar to fall before bringing their profits to the US.
© 2022 AFP