Strong Dollar, Weak Euro: How the Currency Shift Is Hitting Companies

(Bloomberg) — Emerson Electric Co., which says it prides itself on solving its customers’ toughest challenges, is having to overcome a conundrum of its own: how to make the strong dollar and a weakening euro work in its favor.

One solution devised by Chief Executive Officer David Farr is to shift more manufacturing to countries with a depressed currency. Missouri-based Emerson, which makes industrial measuring and manufacturing gear for customers in the oil, packaging and automotive industries, will bolster output in Mexico and parts of eastern Europe to cushion the fallout from the strong home currency, Farr said.

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The picture couldn’t be more different in Europe, where the single currency’s plunge to a 2003 low is fattening revenue at companies from Siemens AG to Deutsche Post AG. On its lucrative North American routes, Deutsche Lufthansa AG is targeting U.S. customers who have more buying power with the stronger dollar. With the euro approaching a record quarterly decline versus the dollar, European stocks are also becoming more attractive, a survey of investor relations executives by Bloomberg Intelligence found.

“If the dollar stays the way it is, big industrial companies like Siemens benefit from a bit of a tailwind, because the weak euro boosts the sales of our products, absolutely no question,” said Siemens Chief Executive Officer Joe Kaeser, whose German company competes with Emerson.

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Currency Obstacles

A weaker euro lowers the cost of exports from the euro region while making U.S. goods more expensive. European companies selling in the U.S. also earn more when they translate those sales back into their home currency, while U.S. companies garner fewer dollars from their sales in euros.

For example, U.S. clothing retailer Abercrombie & Fitch Co. has the most at stake in its industry because it gets 27 percent of sales from Europe, according to Poonam Goyal, a Bloomberg Intelligence analyst. The euro’s weakness sliced 2.7 percentage points from fourth-quarter sales, the New Albany, Ohio-based company said this month.

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The retailer, already struggling in its home market after falling out of favor with young shoppers, said currency exchange rates “are expected to be a significant headwind to our results in 2015.” Last year’s sales would have been about $ 135 million less at today’s currency rates, according to Chief Financial Officer Joanne Crevoiserat.

The contrary effect of the euro slump is evident at Deutsche Post, Europe’s largest postal service. Currency translations cut 828 million euros ($ 873 million) from the Bonn-based company’s revenue in the first half of last year but as the euro fell in the second half, foreign-exchange effects added 421 million euros in sales, according to data compiled by Bloomberg.

ECB Intervention

That trend is continuing in 2015 as the euro has weakened 13 percent against the dollar to $ 1.0544. The currency may reach parity with the dollar by the end of the year, Deutsche Bank AG strategists said last week, versus their previous forecast of $ 1.05. The last time the euro and dollar were equal was in 2002, the year euro notes and coins began to circulate publicly.

The European Central Bank spurred renewed declines in the euro with its plan, begun last week, to buy government bonds. The euro has slumped 7.9 percent this year, the most among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar, the best performer, has gained 7.9 percent and the yen advanced 6.3 percent.

“Earnings of U.S. stocks rose almost twice as fast as those of European companies in the past 15 years,” said Stefan Kreuzkamp of Deutsche Bank’s Asset & Wealth Management business. “Some of that gap may be due to the weak U.S. dollar in that period, and that tailwind may now reverse and turn into a boost for earnings in Europe.”

Currency Hedging

The euro’s slump also is cushioning Europe’s biggest oil and gas producers from the decline in crude prices. France’s Total SA, Italy’s Eni SpA and Repsol SA of Spain will benefit the most, according to data compiled by Bloomberg Intelligence. The companies pay a large chunk of salaries, rent and other costs in euros, while earning revenue from oil and gas sales in dollars — the industry’s dominant currency.

Still, in the short term, the gains may be relatively limited, as companies typically hedge against major currency fluctuations, Siemens CEO Kaeser said. Farr, his counterpart at Emerson, said on a Feb. 19 conference call that countries around the world are in the process of “changing their competitiveness” by devaluing their currency. Emerson’s shift of manufacturing capacity to Mexico and eastern Europe didn’t result solely from the dollar’s strength, but it is one factor, a spokesman said.

In the U.S., medical-device companies will see their earnings cut by an average of 6 percent because of the strength of the dollar, according to Bloomberg Intelligence. While St. Jude Medical Inc. will take the biggest hit, the St. Paul, Minnesota-based company plans to implement hedges to offset the impact, leaving Abbott Laboratories as the most exposed, BI’s Jason McGorman said in a note.

Deal Frenzy

The impact of the euro’s plunge may extend beyond earnings. The drop will make acquisitions in Europe more affordable for U.S. companies and thus may spur dealmaking, while U.S. companies aiming to sell European assets may hold off until the euro appreciates.

Last month, Ball Corp., a U.S. maker of beverage cans, agreed to buy London-based Rexam Plc for $ 6.8 billion, less than it would have cost a year ago thanks to the relative strength of the dollar and U.S. stocks against their European counterparts.

The euro is positive for the European companies, with the effect visible in rising share prices, said Deborah Aitken, a luxury-goods analyst at Bloomberg Intelligence in London. The Euro Stoxx 50 Index of companies in the euro region has surged 16 percent this year, while the Standard & Poor’s 500 Index of U.S. companies has fallen 0.3 percent.

Luxottica, the world’s largest eyewear maker, is among those benefiting.

“Our expectation for 2015 is that currency will generate tailwinds in our results both top and bottom line,” Chief Financial Officer Stefano Grassi said on March 3. “And obviously, we’re very excited about that.”

To contact the reporters on this story: Phil Serafino in Paris at [email protected]; Richard Weiss in Frankfurt at [email protected]; Alex Webb in Munich at [email protected]

To contact the editors responsible for this story: Jacqueline Simmons at [email protected] Benedikt Kammel, Thomas Mulier

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