The Declining Dollar

For every penny the euro increases against the dollar, United Technologies Corp. records an additional $10 million in earnings. A diversified manufacturing behemoth that earns more than 60 percent of its revenues outside the United States, UTC received an earnings boost of about $100 million last year as the dollar slid against the euro — and slid, and slid a little more. Despite its far-flung revenue streams, the company has never done any financial hedging, says vice president of accounting and finance Greg Hayes. Instead, UTC relies on what are essentially operational hedges: ensuring that it manufactures its products in the markets where they are sold. "The key is to manufacture locally and not put yourself into situations where you're affected by things you can't control, like foreign exchange," says Hayes.

With the dollar at its weakest point in a decade, protection against currency risk looms ever larger on the CFO's agenda. For U.S. manufacturers selling into Europe, the dollar's decline has been a boon, allowing them to accelerate overseas growth and boost earnings by 5 or 10 percent. But for other companies, particularly those based in Europe, the prospect of a permanently weaker dollar has heightened the need to diversify their operations, causing some to consider moving manufacturing facilities to a suddenly lower-cost United States. In Asia, rapidly rising currency values have CFOs thinking about ways to protect the margins on their extensive U.S. sales.

While companies have long used financial hedges for short-term currency problems, the fact that businesses are changing their operations in response to the dollar's fall suggests they suspect that the greenback's weakness may be a long-term phenomenon. According to the most recent Duke University/CFO magazine Global Business Outlook Survey, a stunning 50 percent of Europe's CFOs and 60 percent of Asia's think the decline in the dollar represents a permanent devaluation. A third of their U.S. counterparts agree.

"I think it's a fundamental adjustment," says Charles Kane, CFO of investment firm Global BPO Services and a lecturer on international finance at the MIT Sloan School of Management. "There are a lot of factors driving the dollar down." And it could fall still further, for example, if the oil-exporting countries decide to peg oil prices to another currency or to a basket of currencies.

Even those who say the dollar will bounce back are moving to protect themselves from the downside or to take advantage of its current underdog status. "The dollar has fallen too far too fast, at least relative to the euro," says Scot Carlson, former CFO of Black Diamond Equipment, a small climbing- and ski-equipment manufacturer based in Salt Lake City that sells one-third of its product in Europe but manufactures in the United States and China. Still, he says, "to be a global player, it has become increasingly important to hedge your bets."

Seizing the Day
Not that a sagging dollar is altogether bad news. The earnings benefit for companies with overseas sales is undeniable. According to the Duke/CFO survey, half of U.S. CFOs with significant international sales have seen a benefit from the dollar's decline.

For Compact Power, a small manufacturer of landscaping and construction equipment based in South Carolina, the falling dollar has meant a rapid rise in the company's overseas sales. The $100 million company began selling internationally two years ago, has doubled its international sales in the past year, and plans to double them again in 2008. "We've absolutely accelerated our international growth because of the exchange rate," says CFO Norman Boling. "The falling dollar has made us competitive in markets where we're up against established competition."

Compact Power quickly developed two diesel units to distribute in England this year, and has entered into a distribution agreement with an Italian manufacturer to sell that company's product — tractors — in the United States. To address currency fluctuations, the two companies agreed on a rate in their contract, a strategy Compact Power plans to continue with other partners going forward. While the manufacturer does not do financial hedging, "by locking down the exchange rate at which we purchase, we can take out some of the risk," says Boling. Trade partners have been willing to agree on rates in their contracts because the practice removes uncertainty for them as well. "We might feel a pinch here if the dollar goes back the other way," says chief operating officer Michael Edwards. "We're developing sources out of Europe and other regions so that we can play the other side when that happens."

U.S. companies are also seeing a boost from the dollar's weakness at home, as tourists from overseas flock to stateside shopping centers. Stephen Sterrett, finance chief at Simon Property Group, the largest shopping-mall owner in the United States, says foreign travelers have provided a big boost to the company's malls and outlet centers in the past year. "We have seen a disproportionate impact on sales in centers where there are a significant number of international tourists," says Sterrett. "The foreign tourist's purchasing power is greater than it has ever been before." While European tourists have packed Simon's East Coast locations, the company's shopping centers in Houston have welcomed an influx of travelers from Mexico and South America. Shoppers from Canada have bolstered sales at malls on the northern border as the Canadian dollar has reached near-parity with its U.S. counterpart.

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