Tags: dollar | earnings | strong | corporate

WSJ: Dollar's Surge Hammers US Corporate Earnings

By    |   Monday, 27 April 2015 07:00 AM

The dollar's jump in recent months is making a mockery of U.S. corporate profits. The Dollar Index, which measures the greenback against six major currencies, hit a 12-year high last month.

A strong dollar hurts U.S. companies' earnings by making their exports more expensive in foreign currency terms and lessening the value of their foreign revenue when it's converted into dollars.

Just last week, Procter & Gamble reported that the dollar's strength pushed sales volume down 2 percent in the first quarter, while McDonald's said the ascendant dollar trimmed revenue by $700 million. And experts expect the carnage to continue.

"It's hard to get ahead of a very strong dollar," Greg Hayes, CEO of United Technologies, told The Wall Street Journal.

Pepsi said the dollar's strength could slash its profit by 11 percentage points this year. "The challenge is to balance volume and revenue," said Pepsi CEO Indra Nooyi, according to The Journal.

So how should investors react to the greenback's surge?

"In positioning for renewed dollar strength, it may be best to resist the temptation of big trades," Mohamed El-Erian, chief economic adviser at Allianz, writes in the Financial Times.

"A superior approach would be to maintain larger cash balances while also exploiting relative price movements and highly differentiated positioning within asset classes."

And what positions should we take?

"That means combining exposures that favor the dollar versus other major currencies (particularly the euro) with hedged European versus U.S. equities positioning and, on the government bond side, U.S. bonds versus German Bunds."

Many experts says European stocks offer more attractive valuations than those in the United States. The S&P 500 index carried a trailing price-earnings ratio of 20.87 as of April 17, up from 17.90 a year ago, according to Birinyi Associates.

As for bonds, the U.S. 10-year Treasury yield stood at 1.93 percent Friday, compared with 0.15 percent for 10-year German government bonds.

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The dollar's jump in recent months is making a mockery of U.S. corporate profits. The Dollar Index, which measures the greenback against six major currencies, hit a 12-year high last month.
dollar, earnings, strong, corporate
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2015-00-27
Monday, 27 April 2015 07:00 AM
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