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Strong US dollar is said to be a threat for American Companies

Experts believe that strong US dollar have some bad effect on the American firms as proven back in the global financial crisis of 2008.
Strong Us Dollar
Some market analysts also believe that the increasing value of greenback may lead to an earnings recession.

The US dollar, which has gained 22 percent in the last 12 months against a basket of major currencies, has landed a double whammy on American firms with big sales abroad.

Analysts say the earnings and revenue from foreign markets are worth less when they are actually translated into US dollars, making their costs relatively less competitive against rivals producing in those nations whose currencies are weakening.

Strategists at Bank of America/Merrill Lynch term the condition created by the moves of greenbacks with such a magnitude in the past few months as an “earnings recession”.

In general terms, ‘earnings recession’ is defined as at least two successive quarters of drop in the earnings from the quarters of years earlier.

According to the brokerage, a 25 percent surge in the greenbacks in a 12-month period has historically coincided with a drop of 10 percent in the earnings of market per share.

The earnings per share of S&P 500 are expected to decline 3.1 percent during the first quarter and 0.7 percent during the second quarter before modestly recovering in the second-half of 2015.

As per the reports, about one-fifth of firms featuring at the S&P 500 have cautioned on earnings for the first quarter, with nearly 49 companies mentioning the adverse effects of the US dollar on results.

Richard Bernstein, a senior Wall Street strategist and chief executive of New York-based Richard Bernstein Advisors, said, “This is just the beginning…This impact of the dollar on US earnings could last for three to seven years. It may not happen every quarter but there’s a secular risk to U.S. earnings, primarily to multinationals, as the dollar appreciates.”

The analysts’ expectations for earnings of S&P 500 are likely to keep declining as firms tally the impact of US dollar on results in the upcoming weeks.

The US dollar, which measures the greenbacks against basket of six major currencies, namely yen, euro, pound, Swedish krona, Swiss franc and Canadian dollar, has added about 3.5 percent since then.

On Wednesday, the Federal Reserve Bank lowered its expectations for the economic growth and inflation in the United States over the next two years. The step was widely seen as an acknowledgment by the US central bank that the rising dollar has stalled Fed’s plan to carry on with most awaited raising interest rates.

On the other front, the greenback’s gains are proving to be a boon for rivals in Europe and many other regions having more of their costs in currencies, like euro, that have dropped and will get the benefits of translation from dollar sales.

About Jules D. Smith

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