NEW YORK- US companies are ramping up efforts to protect their profits from a relentless rally in the dollar, as the greenback surges to multi-decade highs.
The dollar has climbed about 15 percent against a basket of currencies over the last year, helped by a hawkish Federal Reserve and heightened geopolitical tensions that have boosted the greenback’s safe-haven appeal.
That surge has reduced the profits of US multinational companies that convert foreign currency into dollars, adding to corporate worries over soaring inflation and a murky economic outlook and pushing some to more actively seek ways to hedge their earnings.
Companies citing currency headwinds in their latest earnings reports include Coca-Cola Co KO.N, Procter & Gamble PG.N and Philip Morris International Inc PM.N. More broadly, analysts have lowered their overall forecast for S&P 500 second-quarter profit growth to 5.6 percent from 6.8 percent at the start of April.
“Corporates have been spurred into action by the dollar’s untrammeled rise – and by the breaking of psychological barriers in most major exchange rates,” said Karl Schamotta, chief market strategist at business payments company Corpay.
The dollar stands at a two-decade high against the Japanese yen and a more than five-year high against the euro, after rising 13 percent and 8 percent respectively against the currencies this year.
To prevent big exchange rate moves from creating big swings in earnings, businesses are using various types of hedging strategies, including those that employ forwards and options.
While little industry-wide data are available to gauge how US companies’ hedging decisions are being driven by the dollar’s big advances, several firms that advise companies on managing FX risk note a rise in hedging activity.
“Some of the corporates we work with that have a set hedging policy have a percentage band as to how much of their exposure they are supposed to have hedged. We are seeing those clients move to the high side of their band,” said John Doyle, vice president of dealing and trading at Monex USA.
Hedging activity by Monex’s clients rose 22 percent uptick in March 2022 versus 2021, and was up 24 percent for the first quarter compared with last year, Doyle said.
The urgency to guard against adverse exchange rate moves comes after years of muted FX volatility, during which currency fluctuations had limited impact on company earnings. – Reuters
