Bottles of Coca-Cola travel along the production line at Coca-Cola Enterprises bottling plant in Sidcup, UK. Just this week, Atlanta-based Coca Cola, the world’s largest soft-drink maker, said currency movements will cut its pre-tax profit by 5% to 6% next year.
Bloomberg
New York
The strongest dollar in more than five years is threatening to wreak havoc with the earnings of US companies for a second straight quarter and into 2015.
Just this week, Atlanta-based Coca Cola Co, the world’s largest soft-drink maker, said currency movements will cut its pre-tax profit by 5% to 6% next year. Pfizer, the biggest US drugmaker, has said it “expects significant negative sales and earnings impacts from foreign exchange” this quarter.
While a rapidly rising dollar can be seen as sign of confidence in the health of the US, it can also make the goods made by American companies less competitive and render hedges designed to protect against steep moves less effective. The US Dollar Index is poised to end 2015 more than 6% higher than the median estimate of strategists surveyed by Bloomberg on June 30.
“Corporations are going to have to pay a lot more attention to currency movements going forward,” Shaun Osborne, the chief currency strategist at Toronto-Dominion Bank, Canada’s largest lender, said by phone on Wednesday. “The dollar will continue to appreciate. It will also be a much more volatile environment.”
The US Dollar Index, which measures the greenback against the euro, yen and four other major currencies, soared to 89.550 this month from as low as 79.740 on July 1, and was at 89.227 at 8.13am New York time. The median estimate on June 30 was for it to reach 83.6 by the end of 2014.
Traders have sought the dollar as a haven from global market turmoil, as well as prospects that the Federal Reserve is moving closer to raising interest rates after keeping its benchmark near zero since 2008.
With the Fed dropping a pledge to keep rates low for a “considerable time” at its December 16-17 meeting, traders are more confident than ever that US borrowing costs will rise sometime next year. That’s boosting the dollar’s appeal, along with the market disruptions that wiped more than 40% off the price of oil since mid-year and sent Russia’s rouble tumbling beyond 80 per dollar earlier this week.
FiREapps, a Scottsdale, Arizona-based company that advises on reducing the impact of currency swings, shows how much corporations are being hit. FiREapps monitored third-quarter earnings calls of 846 North American companies, and found 202 mentioned negative currency effects, about 50% more than in the previous quarter. More than 10% of those reduced their 2014 earnings guidance, by an average 7 cents per share, according to a December 8 report.
“Many companies have international revenues as well as international expenses, both of which in a perfect storm can have a negative impact from currency movements,” FiREapps chief executive officer Wolfgang Koester said by phone on December 11. “With the moves in oil, we’re going to see even bigger surprises in currency movements.”
Cincinnati-based Procter & Gamble Co, the largest consumer-products company, said in October that foreign-exchange moves reduced core earnings by 7 cents a share in the first quarter of its fiscal 2015 year. Overall its net sales were $20.8bn, unchanged versus the prior year.
Standard & Poor’s 500 Index earnings per share are forecast to increase to $30.02 in the fourth quarter, up 3% from a year earlier, according to data compiled by Bloomberg. The full-year estimate for 2015 is $125.70, up 7.3%.
Coca-Cola’s December 15 statement followed its October earnings report, when it said currency movements contributed to a 14% decline in third-quarter net income.
Pfizer, based in New York, has lowered its full-year sales and earnings forecasts to reflect foreign-exchange impacts as well as the anticipated effect of generic-drug competition for Celebrex in the US. “The quarterly profile of earnings will be heavily influenced by the variation of foreign-exchange impacts from period-to-period,” the company said in October.
Retailer Costco Wholesale Corp said on December 10 the stronger dollar was hurting international same-store sales, which grew 1% in the first quarter of its fiscal year 2015, ended November 23, when the impact of currency fluctuations and gas-price deflation was taken into account. They rose 7% without those effects.
There’s little sign of relief for companies from either currency volatility or dollar strength.
JPMorgan Chase & Co’s Global Volatility Index, a measure of anticipated price swings, touched 10.09% yesterday, the highest since September 2013. These gyrations can eat into profits and add to the burden caused by the dollar’s advance.
The Dollar Index is forecast to rise to 94 by the end of 2015, according to the median estimate of strategists surveyed by Bloomberg.
In its latest policy statement, the Fed swapped out its usual reference to keeping borrowing costs low in favour of the assertion than it “can be patient” in starting to normalise rates. Strategists saw it as an attempt by policy makers to give themselves more flexibility to respond to economic data.
The effects of Fed tightening on the US currency are amplified by the divergence with the euro region and Japan, which are committed to further expanding the money supply. Strategists surveyed by Bloomberg see the dollar advancing against 12 of its 16 most-traded peers next year, including gains of more than 4% versus the euro and yen.
“All the stars are lined up for the dollar, so it has more room to run,” Nick Parsons, the head of research for the UK and Europe at National Australia Bank Ltd in London, said by phone on December 15. “We’re going to increasingly see US corporates taking a hit.”
