The U.S. dollar has risen significantly against other major currencies over the last few months. This already has and will continue to negatively affect U.S.-based companies with global operations.
This isn’t rocket science; as the U.S. dollar increases in value, companies with business outside of the U.S. will have to convert their revenues into the greenback; which will now have less value than it used to.
U.S. Dollar Already Hurting American Companies
Consider this; in its financial results for the quarter ending on April 30, 2015, Wal-Mart Stores Inc. (NYSE/WMT) said that the stronger U.S. dollar negatively impacted earnings per share by approximately $0.03. (Source: Wal-Mart, May 19, 2015.)
You can read more about Wal-Mart’s earnings in a previous Profit Confidential article: see “Wal-Mart Misses Earnings Estimates; U.S. Economy in Trouble?”
Other multinational corporations are seeing the impact of a rising U.S. dollar on their earnings as well.
Johnson & Johnson (NYSE/JNJ) stated, “The decline in adjusted EPS of 4.3% versus the prior year was entirely due to the negative impact of movements in currency rates in the translation of our results, particularly the weakening of the euro compared to prior year. This resulted in a negative impact to EPS in the quarter of approximately $0.13 per share. EPS on a constant currency basis was $1.69 or up 3.7% over the prior year.” (Source: Johnson and Johnson, April 14, 2015.)
General Mills, Inc. (NYSE/GIS) said, “Net sales totaled $4.4 billion, down 1% due to foreign currency effects.” (Source: General Mills, March 18, 2015.)
FedEx Corporation (NYSE/FDX) stated, “In the International Export segment, excluding fuel, yield per package decreased 0.8%, primarily driven by the negative impact of exchange rates, which offset positive weight, rate, and discount changes.” (Source: FedEx, March 18, 2015.)
Where is the Dollar Headed Next?
You see, the Federal Reserve is adamant about hiking the federal funds rate. Federal Reserve Chair Janet Yellen stated, “For this reason, if the economy continues to improve as I expect, I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target.”(Source: Federal Reserve, last accessed May 22, 2015.)
With this, investors are rushing towards buying the greenback. The U.S. is contemplating raising rates, while elsewhere in the world central banks are lowering their interest rates. This makes the dollar a great trade for those outside the U.S.
Please look at the chart below of the U.S. dollar index. It looks at the value of the U.S. dollar compared to other major currencies. Since mid-2014, it has seen a massive increase; up more than 20%.
Chart courtesy of www.StockCharts.com
Going forward, I would not be surprised to see the greenback rising further against other major global currencies. This phenomenon will certainly be an obstacle for U.S.-based multinational companies.