For corporate America, strong US dollar cuts both ways

The dollar’s rise has caught investors’ attention, with many looking toward its effects on corporate revenue. A strong dollar can have adverse effects on U.S. corporations that sell goods overseas, denting exports by making those products less affordable. On the flip side, companies and manufacturers abroad benefit from a relatively weaker local currency.

The corporate effects are another example of how inflation, and central banks’ efforts to tame it, are affecting all corners of the market. The Federal Reserve is in inflation-fighting mode, and its swift tightening has helped the dollar soar this year relative to other currencies. The greenback is the world’s reserve currency and is used to trade commodities across country lines, so changes in its value are felt around the world.

Foreign-exchange rates moved in a tight range for more than a decade after the 2008-09 financial crisis, remaining predictable as central banks kept interest rates low and stocks moved mostly in one direction. Many companies scaled back so-called hedging programs in which they buy derivatives that shield them from currency fluctuations.

That has caught themflat-footed over the past year as the dollar has surged, notching record gains against the British pound, the Japanese yen and other currencies. In July, the euro slid below parity for the first time since 2002. It briefly rebounded but is now still there, trading around 98 cents.

The WSJ Dollar Index, which measures the dollar against a basket of 16 currencies, is up more than 16% so far this year. That is a big gain in currency terms, and the dollar also wrapped up its best quarterly performance since 2016.

“If you talk to any multinational chief executive officer right now, they’ll talk about two things: foreign exchange, which is a total nightmare right now at the strength of the dollar," said Bret Taylor, co-chief executive officer at Salesforce Inc., at an investor conference in September. “And they’ll talk about the complexity of compliance globally."

The business-software provider said in August that it expects foreign-exchange headwinds to decrease full-year sales by $800 million. It had previously estimated a hit of $600 million.

More companies have been mentioning the impact of the stronger dollar in earnings calls and interim reports over the past few months, including American jeans retailer Guess Inc. and luxury Italian necktie maker Brunello Cucinelli SpA.

The dollar began its rise in the first half of the year, but it has accelerated recently. Many investors around the world have been drawn to the dollar as a source of relative strength and stability after Russia’s war against Ukraine and China’s resurging Covid-19 lockdowns upended stocks, bonds and commodities.

In the third quarter, the greenback gained more than 9% against the British pound as the pound tanked and U.K. bond yields soared. Other currencies have extended their slides, and measurements of volatility used by Wall Street traders indicate price movements in foreign-exchange markets are even more erratic than in stocks.

Mobile-payments company Boku Inc., which does business with the likes of Netflix Inc. and Amazon.com Inc., said the strong dollar dented its revenue coming from trading partners around the globe.

“We had a significant foreign-exchange headwind. That is heavily to do with Japan and Korea, but also some of the other currencies like euro and British pound," Boku Chief Financial Officer Keith Butcher said in an earnings call last Tuesday. “All went against us."

The dollar has been marching higher in part because investors tend to reward countries whose central banks act aggressively to curb inflation. In September, the Fed raised rates for the fifth time this year and signaled that additional large increases were likely.

“The world has changed over the past two weeks," said Themistoklis Fiotakis, a strategist at Barclays. “The Fed is now in overdrive and this is supercharging the dollar in a way which, to us at least, was hard to envisage even within our original bullish dollar view."

Investment banks sell protection against currency fluctuations via derivatives or forward contracts, and many companies have prepared for the volatility.

Saga PLC, a U.K. insurance-and-travel company, said it fully hedged all fuel and dollar transactions into 2024 for its ocean cruises. But the business cut full-year profit forecasts last Tuesday, citing the effects of inflation on insurance claims.

For companies outside the U.S., the strong dollar can be a boon for business. That is because Americans’ money goes farther when they buy goods and services from overseas.

For Swedish car maker Volvo, the strong dollar has been a good thing. Analysts at research firm Carlsquare estimate the company’s earnings will increase by as much as 7% compared with its earnings in the past 12 months as a weaker Swedish krona made the company’s exports more affordable for Americans and Europeans. The U.S. dollar has gained more than 20% against the Swedish krona in the year to date.

Even Salesforce acknowledged that a stronger dollar has its benefits. Mr. Taylor said the San Francisco-based company recently bought a company in Brazil to complement its offerings.

“It was probably affordable now because of the exchange rate," he said at the investor conference. “This too shall pass, and the dollar is not going to be this strong forever."