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Weakening dollar could feature in earnings reports this week

Justin Ho Apr 24, 2023
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The dollar’s value had been falling since the latter part of 2022. Andy Jacobsohn/AFP via Getty Images

Weakening dollar could feature in earnings reports this week

Justin Ho Apr 24, 2023
Heard on:
The dollar’s value had been falling since the latter part of 2022. Andy Jacobsohn/AFP via Getty Images
HTML EMBED:
COPY

It’s a big week for corporate earnings. A lot of tech companies are reporting this week, including Alphabet, Microsoft, Meta and Amazon. People will also hear from UPS, PepsiCo, Boeing and a number of other major corporations.

Analysts will surely be watching for any commentary on job cuts and what these companies have to say about the overall economy and whether it’s slowing down.

But there’s another factor that could be boosting profits at many big U.S. companies this year — the weakening U.S. dollar.

Until around last September, the dollar’s value had been rising. That’s because a lot of investors were buying U.S. government bonds, which paid more interest, thanks to the Federal Reserve’s rate hikes.

“But when we enter the later part of 2022 and we go into that fourth quarter, all of the sudden, other central banks begin to catch up,” said Christopher Vecchio, head of futures and foreign exchange at options researcher TastyLive.

The dollar’s value has been falling in the time since, especially since this year, the Federal Reserve is slowing down its rate hikes.

“And now we’re seeing other central banks like the [European Central Bank] and perhaps even the Bank of England having to do a little bit more to fight inflation than previously anticipated,” Vecchio said.

A weaker U.S. dollar makes American products more competitive overseas. Companies also get more dollars when they bring overseas profits back home, said Santosh Rao at Manhattan Venture Partners. 

“A company like McDonald’s, Coca-Cola, Pepsi, all of these … they have huge sales outside the country,” he said. “So, these companies benefit.”

But a weaker dollar also makes it more expensive to make overseas investments. Christopher Gilchrist, principal analyst at Forrester Research, said an American company that makes products in another country will have to pay more for things like labor and machinery.

“So, as the dollar gets weaker, where they have assets globally … could expose them to having to spend a premium just to keep it going at a steady state,” explained.

Plus, for anyone in the U.S. that imports products, a weak dollar doesn’t go as far. Cathrine Reynolds imports tile for Palmetto Tile Distributors in South Carolina, and she buys loads of her tile from factories in Europe.

“Most of my factories will charge in euros, and we convert it over,” she said. “So, when that conversion rate is done, I end up paying more.”

Reynolds said that’s yet another factor that’s causing her to raise prices this year.

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