What a weak dollar giveth, a strong dollar taketh away.
That’s one of the bitter pills companies and investors alike are having to swallow this earnings season, as corporate revenue growth is proving to be weak and too often missing Wall Street’s estimates.
Blame the eurozone. Not only is much of it wracked by recession, which isn’t doing any favors for demand, but the ongoing panic from the debt crisis has given the dollar a tremendous boost.
Fear that Europe could unravel and touch off another Lehman-like freeze in the global financial system has caused a rush into supposedly safer assets. That means the greenback is on fire.
After all, it is the world’s reserve currency. And it’s not just dollars that traders and investors are after. They’re also seeking safety in U.S. government debt. (The Treasury owns a printing press, and the U.S. has lots of taxpayers to make good on its obligations.)
But, of course, Treasurys are priced in dollars. If you’re a foreign buyer of U.S. government debt, you need to buy greenbacks first. That creates yet more demand for dollars at the expense of other currencies. It’s not a coincidence that the yield on the benchmark 10-year Treasury note is scraping out new record lows while the dollar is close to a two-year high.
Indeed, the U.S. Dollar Index, which measures the greenback against a basket of major currencies, has jumped 15% in the past 52 weeks. To put the moves in perspective, during the depths of the last crisis, the dollar index plumbed lows of about 72 in March 2008, and spiked to highs of 88 in February 2009.
These days it trades at 84, levels last seen in the summer of 2010 — and its directional strength is up, up, up.
Unfortunately, this earnings season we’re learning that this has been wreaking havoc on companies with lots of international revenue.
Not only does a stronger dollar make U.S. goods more expensive overseas, but the currency exchange strips out value when the money is converted back to greenbacks. Take weaker euros and exchange them into stronger dollars, and companies get whacked by the same unpleasant forex reality American tourists experience when they go on a European holiday.
The deleterious effects of foreign currency exchange are being felt by companies far and wide. McDonald’s (NYSE:MCD) said revenue essentially was flat in the latest period. Not good. Excluding currency fluctuations, revenue would have grown 5%.
Fellow Dow component DuPont (NYSE:DD) said forex sliced 3% off its top line. And in an even more painful example of the stronger dollar, Coca-Cola Enterprises (NYSE:CCE) had to cut its full-year guidance, in part because forex will depress 2012 earnings by about 12%.
Those are just a few examples, but the strong dollar is contributing to a situation where sales are coming up short more often than profits this season.
Earnings results are so far close to historical averages in terms of matching or beating Street estimates, notes David Kostin, chief U.S. equity strategist at Goldman Sachs (NYSE:GS). But sales are missing by a wide margin.
“Lower volumes, international exposure, and (forex) sensitivity are recurring themes across sectors,” Kostin says in a client note. “Weaker 2Q economic growth in Europe and Asia along with dollar strength impacted sales of internationally-exposed companies in industries from Pharmaceuticals to Semiconductors.”
Perhaps most worrisome is there’s not much companies can do about the stronger dollar. As long as Europe flirts with the precipice, a weaker euro and global flight to safety has the greenback’s back.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.