The pros and cons of a strong dollar

The U.S. dollar began rising at the beginning of the year and is having a big moment right now as central banks globally attempt to battle high inflation.

So far this year, the U.S. Dollar Index, which measures the greenback against six global currencies, including the euro and the Japanese yen, is up nearly 20%. For some insight on what this means for U.S. companies, I had a conversation with Johns Hopkins University economics professor Jonathan Wright. The Harvard grad researches econometrics, empirical macroeconomics and finance. 

“The Fed is raising short-term interest rates quite steeply, and is doing so more quickly than other central banks,” Wright says. “And so that makes dollar-denominated assets more attractive.” (The latest interest rate increase by the U.S. central bank was 0.75%—for the third consecutive time.)

“On a treasury bill today, you’ll get something like three and a half or 4% in the U.S.” Wright says. “And if you had a comparable bill in Europe, it’d be much lower, maybe 1%. So that causes capital flow into the dollar, and drives the dollar up.”

The second reason for the strong dollar is “not specifically due to the Fed, but it’s that there’s a lot of geopolitical tension at the moment,” he says. “And the U.S. tends to be the recipient of safe haven flows at times like this.”

The pros and cons? On the plus side, a rising dollar will probably drive U.S. inflation down somewhat, Wright says, because it makes imports into the U.S. cheaper. However, “The con is that it’s harder for U.S. corporations to sell their goods overseas because they are now more expensive,” Wright explains. “But even without any actual trade going on at all, it’s putting pressure on earnings for multinational subsidiaries.”

So if you’re a multinational company, right now you’re feeling more of the headwinds from the dollar rising than companies that only sell products in the U.S.? “I think that will be true,” Wright says. “And in particular, firms like Apple that have a lot of their business overseas, producing and selling, they’re still going to find that when they convert that earnings back into dollars, they get less.”

During a conversation I had with Dell Technologies CFO Tom Sweet in September he said that 50% of Dell’s revenue comes internationally, and “currency fluctuation has been pretty significant.” 

“Our selling prices are generally in local currency,” Sweet explained. “As the dollar has strengthened, adjusting local currency list prices so that you try to keep the U.S. dollar P&L whole has been a careful balancing act. How much can you adjust prices but not stifle demand?” If you can’t move list prices to cover all of the currency movement, he said other methods may be to compress discounting or other promotional incentives to try to keep the P&L whole.

During earnings calls this past summer, some leaders noted that the strong dollar will be a drag on their profits, Fortune reported. “A lot of these [multinational] firms will have put in place currency hedges some time back,” Wright explained. “But the pain is still going to be there. But if they had hedged their foreign currency exposure a year or two ago, then at least they get some breathing room in response to the adverse impacts of the current dollar appreciation. That doesn’t solve the underlying problem, particularly if the dollar strength remains.”

As for multinationals that failed to hedge adequately? “It’s kind of too late,” says Wright.

I asked Wright what he sees happening into 2023. “Foreign exchange rates are terribly hard to predict,” he told me. However, “it’s unlikely to completely turn around within the next few months,” Wright says. “As long as the Fed is continuing to tighten monetary policy, I think it’s reasonable to expect that the dollar will remain extremely strong.” 

“I think there’s three big occasions of dollar strength — the mid-’80s, the late ‘90s and today,” Wright explains. “It’s got a way to go before it gets to as far as it did the last two times. If I remember correctly, the euro went down to 80 cents last time. Today, it’s at 98 cents.”

See you tomorrow.

Sheryl Estrada
sheryl.estrada@fortune.com

Big deal

Morgan Stanley’s E-Trade released data from its monthly sector rotation study. The top three sectors in September were consumer discretionary (nonessential goods and services, like cars and entertainment), information technology, and communication services. All three sectors increased in September, with consumer discretionary reaching 12.52%, according to the findings. Information technology increased from 6.09% in August to 10.17% in September. The results are based on the trading platform’s customer notional net percentage buy/sell behavior for stocks that comprise the S&P 500 sectors.

Courtesy of Morgan Stanley's E-Trade

Going deeper

"35-year-old Canva founder Melanie Perkins got rejected by 100 VCs. Now her $26 billion design startup is ready to take on Microsoft and Google," a new Fortune feature article by Emma Hinchliffe details how Perkins, who is Australian, founded the design platform with zero Silicon Valley connections. It's now the world's most valuable startup founded and led by a woman. "Canva is a towering force in the graphic design space, with 3,200 employees, 90 million users, and an easy-to-use web-based tool that lets users design social media graphics, build presentations for school or the office, and edit videos—and will soon help them do much more," Hinchliffe writes. 

Leaderboard

Martin Small was promoted to CFO at BlackRock, Inc. (NYSE: BLK), effective on or about March 1, according to the company. Small will succeed current CFO Gary S. Shedlin who will transition his CFO responsibilities after the firm completes its 2022 financial reporting processes. He will take on a new role as vice chairman working directly with key strategic clients of the firm. Shedlin joined the company in 2013. Small has been the head of BlackRock’s U.S. Wealth Advisory business for the past four years. He previously served as head of iShares in the U.S. and Canada and leadership roles for BlackRock’s Financial Markets Advisory unit. Small joined BlackRock in 2006 in its legal and compliance team after serving as a capital markets investment management and transactional associate for the law firm Davis Polk.

Julie Booth, CFO, and treasurer at Rocket Companies (NYSE: RKT), a fintech platform company, will retire effective Nov. 15. Booth will remain with the company in a strategic advisory role. She joined Rocket Mortgage 19 years ago and has served as the organization's CFO since 2005. Brian Brown was promoted to CFO and treasurer. Brown, who joined Rocket in 2014, currently serves as chief accounting officer. He has also been a member of the investor relations efforts of Rocket Companies since the IPO in August 2020. Before joining Rocket, Brown served eight years with EY where he consulted with publicly traded financial services companies.

Overheard

“We look for people that think differently, that can look at a problem and not be caught up in the dogma of how that problem has always been viewed. And so [we look for] somebody that will kind of walk around the problem and look at it from different angles and use their creative juices to come up with solutions.”

—Apple CEO Tim Cook explained during a speech at the University of Naples Federico II in Italy, where he received an honorary degree in innovation and international management, that creativity is one of the qualities the tech company seeks out in would-be employees, as reported by Fortune.