Major exporters in the United States are starting to be pinched by the strengthening U.S. dollar as the Federal Reserve raises interest rates to push back on the soaring inflation afflicting the economy.
Since the start of March, right before the Fed started increasing its interest rate targets, the dollar has risen by more than 6%. The value has increased 8% since the start of the year and is now nearing the highest it has been in years, other than a short-lived spike at the outset of the pandemic.
The rising dollar has implications on global trade for U.S. manufacturers, who are already anticipating the negative financial effects that the strengthening currency will have on their international business.
Several of the biggest U.S. companies have mentioned the deleterious effects of the dollar’s increasing value in earnings reports.
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During an earnings call earlier this month, Pfizer CFO Frank D’Amelio acknowledged that the rising dollar will cut into the company’s profits.
He cited $2 billion in “anticipated negative impact from changes in foreign exchange rates as the U.S. dollar continued to strengthen against other currencies since we last updated our exchange rate assumptions,” he said, according to a transcript.
Domestic manufacturers who ship products abroad typically like a weaker dollar so that overseas buyers are more willing to buy their products, while domestic retailers, who import cheaper goods from other countries to sell in the U.S., typically favor the dollar being stronger.
For example, a U.S. manufacturer that sells goods in Europe will find it harder to compete because people are going to have to pay more euros for the same dollar, so Europeans end up buying fewer U.S. goods.
Apple’s chief financial officer has said that the dollar’s growing value is having a negative 3% effect on the tech giant’s growth.
“With respect to foreign exchange,” said CFO Luca Maestri, “we expect it to be a nearly 300-basis-point headwind to our year-over-year growth rate.”
An analysis of earnings call transcripts on financial analytics platform Sentieo found that more than 20 companies with market capitalizations in excess of $100 billion have highlighted the adverse effects that the strengthening dollar has had since the beginning of April, according to Barron’s.
The number of companies mentioning the adverse effects is more than double the number that did so during the same period of time last year.
“We’ve seen another step in cost pressures, and foreign exchange rates have moved further against us,” said Andre Schulten, Procter & Gamble’s CFO, adding that the losses are expected “to be a $300 million after-tax headwind to earnings for the fiscal year.”
Desmond Lachman, a senior fellow at the American Enterprise Institute, told the Washington Examiner that the dollar is the strongest it has been in two decades and attributed the relative strength to two main factors: the Fed’s monetary policy and geopolitical turmoil.
To drive down inflation, the Fed has begun hiking interest rates and shrinking its holdings of Treasury securities, thereby shrinking the money supply and raising the price of dollars. That is in contrast to other countries that are keeping interest rates at low levels as they still grapple with the fallout of the coronavirus pandemic. For instance, the European Central Bank still has interest rates at near-zero levels.
Another pressure pushing the dollar’s value upward is Russia’s war in Ukraine and uncertainty about the future of financial markets.
The conflict caused a massive energy shock and sent ripples throughout the global economy. There are also fears that the war could somehow escalate and drag other countries into the fighting, a prospect that would prove dangerous for the world’s fragile and interconnected economy.
When investors in financial markets get spooked by geopolitical uncertainty, they turn to the U.S. as a safe haven.
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While the high value of the dollar might be good for the U.S. in the near term because it makes imports cheaper and helps fight inflation, it also generates trade imbalances, Lachman said. He said borrowing more money from abroad is not good in the long run because it could set the U.S. up for a “dollar crisis” in a couple of years’ time. The trade deficit in goods hit an all-time high of $125.3 billion in March, according to the Commerce Department.
“People always worry that the United States has poor economic fundamentals, that eventually the dollar will lose its attraction abroad,” Lachman said. “In the short term, the dollar’s strength is very good because it helps us fight inflation, but longer-term, it’s not good because it causes the trade account to widen so we become more indebted, and that means in the end, the dollar will slump.”
