Currency Moves: Negative or Positive Headwinds for Multinationals?

One investment factor difficult to predict is the direction of currency moves. In large part, a number of factors that are not necessarily specific to one single country, or one single event impacts currency moves. As an example, does the price of oil impact exchange rates, or does the exchange rate dictate the level of oil prices? Throwing in the demand and supply aspects of oil just adds another twist to the exchange rate question.

One factor is certain; hindsight shows the stronger U.S. Dollar has had a negative impact on earnings for multinational companies in the fourth quarter of 2008. The currency exchange rate impact on earnings will likely have continued negative headwinds through second quarter 2009 earnings results vis-à-vis the comparable periods in 2008.

Standard & Poor's February 18, 2009 The Outlook newsletter ($) reports some currency changes since March 31, 2008 to January 31, 2009 exchange levels:

• U.S. dollar +23% vs. the euro;
• +39% vs. the pound;
• +20% vs. the Canadian dollar;
• +55% vs. the zloty;
• +33% vs. the real;
• +33%vs. the Mexican peso;
• +23% vs. the ruble

The dollar is down 10% vs. the yen and down slightly vs. the yuan renminbi.

It seems the U.S. has been ahead of other countries in addressing the economic slowdown by being ahead of the curve in lowering interest rates as well as the government providing stimulus to the economy. Below is a table of some of the interest rate levels around the globe.

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Source: World Interest Rates Table

If the U.S. economy comes out of this economic recession before most countries around the globe, it is almost a certainty the Federal Reserve will be raising interest rates. Additionally, the level of government stimulus will mean more U.S. Government debt issuance. Higher interest rates would come with this increased supply. So even under a recessionary environment, the higher rates will likely mean continued strength in the dollar and hence, a stronger dollar and currency headwind for U.S. multinationals. One benefit of a stronger dollar is the likely downward pressure this keeps on oil prices.

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Another implication for investors is the impact the negative currency adjustment has on the earnings results reported by multinational companies. Many investors are focusing on high-quality dividend paying stocks as potential shelters from this economic storm. Certainly, constructing the foundation of one's stock portfolio with high quality dividend payers/growers is appropriate in this environment. However, investors need to be aware of the percentage of a company's sales that are derived outside the U.S., and understand what the company does, if anything, in order to hedge currency risk. Exchange rates will impact bottom line results.