Fitch Ratings issued a report cautioning the effects of the strong greenback on US multinationals. The US dollar Index is up over 15% in 2022, appreciating sharply versus other currencies, including the euro, Yuan, pound and yen. The strong “US dollar weakens international demand for US goods and services, given lower purchasing power abroad and the relative pricing disadvantage for US companies.” Sectors relying on exports or having significant offshore production generate a larger portion of revenue outside of the US which increases their currency exposure and vulnerability to a rising US dollar.
We have already seen multinationals such as FedEx warn on the effects of the dollar on earnings. Fitch noted that over 50% of aggregate revenue for their portfolio of chemical and technology companies is generated outside of the US. Some auto manufacturers and suppliers generate 50% or more of sales outside of the US.
Technology
- Within technology manufacturing costs for hardware are mainly priced in US dollars, even for products made abroad, which should help stabilize the cost of goods sold.
- On the margin, technology companies could modestly benefit from a strong US dollar as portions of operating expenses are overseas.
- Hardware and software companies periodically adjust local currency prices, limiting the effects of currency volatility to one to two quarters due to the lag in price adjustments.
- Fitch do not expect a sustained strengthening of the US dollar through 2023 to have a meaningful negative effect on the credit profiles of most technology companies, given relatively high revenue growth and margin profiles.
- However, demand erosion, due in part to upward price adjustments, will become a greater headwind next year as the global economy slows in both the consumer retail and business channels.
Chemicals
- Fitch expects revenue and profitability in the chemical sector to be under pressure in 2023
- Price pressures driven by rising interest rates, a weaker end-market demand outlook and a growing inability to pass along high input costs.
- A strong dollar could also lower sales and operating income, given exports are significant, particularly to Europe and Latin America.
- Fitch believes lost supply stemming from European capacity reductions caused by the high cost of natural gas and other feedstocks could exceed the level of demand destruction. This would support exports and mitigate the negative pricing effects of a strong dollar. It would also provide an opportunity for US producers to gain some market share at least in the short term.
Auto Manufacturers and Suppliers
- Aggregate non-US revenue for Fitch’s publicly rated auto manufacturers and suppliers is above that of their total rated portfolio, at roughly 35%, but some suppliers generate 50% or more of sales outside of the US.
- Auto makers will experience transactional effects of currency movements due to imported parts, but currency risk is mitigated by significant in-market production and certain costs being denominated in local currencies, given the global presence of suppliers.
Source: Fitch Ratings
From the TradersCommunity Research Desk