The Dollar May Be Up, But Are You?

A stronger greenback is a mixed blessing to U.S. companies with big international operations.
Avital Louria HahnNovember 1, 2008

One beneficiary of Wall Street’s bailout is the dollar, which is hot again. The greenback rose 12 percent against the euro between July and October, and is likely to get stronger over the next year, some experts say, even as the Treasury Department piles on debt to shore up banks.

Thanks to the assets the Treasury stands to get in return for its cash infusions, “the debt is not an explosion of the U.S. balance sheet,” says Brian Dolan, chief currency strategist for, a foreign-exchange platform for currency investors. Despite some slowness in distributing the funds, the bailout actions still make the United States look “much further along the road to healing than the UK or Europe,” he says, and these days, “it’s all about which economy stinks worse.” Underscoring the attractiveness of the dollar is the fact that global investors have been pouring money into short-term T-bills as a safe haven during this economic turbulence.

Not every CFO is happy about the dollar’s rapid rebound, as many American companies with significant overseas sales found themselves in trouble this fall. After a 4 percent revenue boost from a relatively weak dollar in the second quarter, Oracle co-president (and former CFO) Safra Catz expected currency fluctuations to create a 3 percent drop in revenue in the third quarter. The fourth quarter doesn’t look much better. PepsiCo CFO Richard Goodman lowered 2008 core earnings estimates by up to five cents a share, based entirely on the dollar’s surge, despite benefits from currency fluctuations in previous quarters. Analysts for other companies, including, Eaton, and Tupperware, also lowered earnings estimates based on currency movements. However, companies like Wal-Mart that extensively rely on imported goods should benefit from a stronger dollar as their buying power increases.

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Many companies scrambled to cover more of their exposures with hedges. The hedging ratio among U.S.-based companies for 2009 exposure hit 55 percent in September, up from 33 percent the previous quarter, according to a JPMorgan survey of 93 large global companies. Hedging opportunities still abound, says Bob Sinche, currency strategist at Bank of America, but CFOs would do well to track them carefully. Corey Edens, CFO of currency-management software company FireApps, says the company often finds “ticking time bombs that could materially impact performance and the ability to reflect [foreign exchange] gains and losses” in consulting with potential clients.

Ultimately, the stronger dollar should also lead to operational changes, including regular price changes and negotiations with suppliers and distributors. “A hedge does not eliminate the effect of currency, a hedge defers it…and that gives you time to adjust your cost structure and sourcing strategy,” noted IBM CFO Mark Loughridge in a recent conference call.

Value of dollar versus euro