Currency News: Dollar’s Appreciation Hurts Domestic Multinational Firms

Currency News

Continual Appreciation of the USD May Hurt Multinational Corporations Based in the U.S.

A huge risk factor for firms investing abroad is the exchange rate risk between their home country and the foreign country of chosen investment. Profit margins can be heavily affected by a percentage change in exchange rates, because a multinational corporation receives its revenues from exports to that foreign country, while its costs are set according to the domestic currency. Therefore, when exchange rates rise and the home currency is worth more relative to another, costs rise and margins are thinned. The equation to find the change in margins by a 1% change in the exchange rate is one divided by a firm’s profit margins. Currently, the dollar has been appreciating and hit a 14-year high, and is expected to continue to rise, as the Fed raised interest rates and a more bullish outlook on the U.S. market has become prevalent. In general, a rising currency can be ‘good’ as it reflects more optimism in the economy, and thus consumption may tend to rise. This may lead to a higher investment by firms, reflecting a hope for a higher return on investment.

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However, the reality for multinational corporations, especially manufacturing firms in the U.S. which already struggle with competitive prices, will likely be hurt by rising costs and faltering sales. Many such firms, such as 3M Co., United Technologies, and Kaman Corp., have already decreased their sales expectations for 2017.

“Manufacturing here in the U.S. has become a lot more challenging than we’d anticipated,” said Neal Keating, Kaman’s chief executive.  Kaman, has seen many of its rival’s have an improvement in costs as the euro has fallen. As a result, the firm began investing abroad, i.e. in Germany. Additionally, firms such as Caterpillar, are expecting their Asian counterparts, specifically in Japan, to capitalize in the weakening currencies in those countries. There is hope, however, in that Trump fulfills his promises to help bring manufacturing jobs back to America through different stimulus measures and tax reductions. Executives of these firms are betting on a rise in domestic sales to offset the rising costs and forecasted fall in sales.

Manufacturing firms such as Boeing and Emerson Electric Co., are even considering moving their operations abroad, despite Trump’s threats of not doing so. They had explained that for example, the Mexican peso fell 13% since the U.S. elections and thus Mexico has become even more attractive to move operations there.

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