The dramatic strengthening of the U.S. dollar is squeezing overseas profits and creating negative foreign currency exposure for U.S.-based multinationals, according to a poll of participants during last month’s Ernst & Young webcast on foreign currency risk and hedging.
When asked what the biggest challenge is for U.S.-based multinationals “in the new era of the volatile U.S. dollar,” 44% of 1,674 respondent to the question said lower overseas earnings due to the strong dollar, translating into smaller U.S. dollar equivalents; 13% said the squeeze in margins of overseas subsidiaries that pay for inventory in U.S. dollars; 11% said the lack of internal capability to hedge against these phenomena; 10% said the uncertainty created in their effective tax rate; and 21% said the question was not applicable to them. (Percentages may not total 100% because of rounding.)
When asked what changes the participants would like to make to manage their company’s foreign exchange risk “in an ideal world,” 30% of the 1,683 participants who responded to that question said that they would make Treasury operational changes; 18% said they would increase GAAP hedging; 22% said they would increase their focus on achieving post-tax hedging; 8% said they would do nothing; and 22% said the question didn’t apply to them.
The participants were also asked which of a number of stated considerations determined how hedging was done at their company. Thirty percent of the 1,584 who answered that query said Treasury; 11% said GAAP; 4% said tax; 31% said all of the above; and 24% said the question was not applicable to them.