The dollar is dandy again ... Now what

If money makes the world go round, corporate leaders must feel like their heads are spinning. Simultaneously facing a credit crisis, a global collapse in demand and plunging stock prices, U.S. multinationals must also manage through the most volatile foreign exchange environment in a generation.
Partway through the earnings reporting season, scores of companies have said foreign exchange (FX) would hurt fourth-quarter results, even in cases where it was a benefit as recently as the third quarter. In a few cases, companies have held off commenting about 2009 because of currency volatility.
For investors, a rapid rise in the U.S. dollar this month means earnings estimates for many multinational companies will have to come down further.
"I don't think people have caught on to the FX effect," said Jeff Markunas, lead manager of the RidgeWorth Large Cap Core Equity Fund. "The fourth quarter is likely to be so bad it will force analysts to accelerate their estimate cutting. I think the currency headwind gets progressively worse until this time next year."
A stampede into dollars has lifted the world's reserve currency to a two-year high versus the euro and a five-year high on the pound. The dollar is up some 18 percent since July on a trade-weighted basis against a basket of currencies.
Some emerging market currencies -- such as the Mexican peso, the Polish zloty and the Hungarian forint -- have lost a quarter of their value since Lehman Brothers' bankruptcy a month ago, as investors flee risk.
Dow component 3M Co gets some two-thirds of its revenue from outside its home market. The benefit to sales from a weak dollar in the most recent quarter was half of what it was three months earlier, and the dollar's reversal could cut fourth-quarter sales by up to 4 percentage points.
One positive is that a stronger dollar helps cut the cost of commodities: steel, copper and oil are much cheaper than just a few weeks ago. But since that retreat reflects expectations of weakness, it is not unalloyed good news.
A strong dollar also hurts U.S. companies by making U.S. exports less attractive, potentially giving European or Asian rivals a competitive edge.
A recent survey by the Manufacturers Alliance found a large majority of exporters improved their competitive position when the dollar was falling. That may now reverse: 80 percent said their exports to Europe are affected by the exchange rate.
As large U.S. companies globalized in recent years, many made an effort to produce close to where they sell. As a result, a stronger dollar can reduce foreign expenses for companies that manufacture overseas, or have foreign debts.
Besides locking in exchange rates through hedging -- a tactic that can prove costly, as some Latin American companies have discovered -- options are limited.
Shifting sourcing from one country to another does not happen overnight; cutting production or jobs is costly and poses the risk of being hit by an unexpected upturn.
Many companies do not try to guess exchange rates. Volatile currencies and commodities kept Caterpillar from making a preliminary 2009 profit forecast, which it normally provides for the coming year in October.

Financial Mirror, October 24, 2008 - By Nick Zieminski - (Reuters)

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