It's a miserable day for U.S. equities, but the U.S. dollar continued its climb, rising to its highest level against the Euro in almost two years.
That's great news for some. But the folks at Briefing.com bring up an interesting point. What does a strong U.S. dollar mean for corporate profit?
Remember, while membership in the S&P 500 requires a U.S. domicile, more than half of the revenue generated by its members comes from outside the U.S. A strengthening U.S. dollar can squeeze overseas revenue and dim earnings prospects.
As Briefing.com writes:
The US Dollar Index has seen a huge move in the third quarter, rising 6.9% to leave it up 6.5% for the year. The bulk of that quarterly gain has come in the latter half of the quarter as the euro, pound, and yen have fallen out of bed with currency traders.
The latter point notwithstanding, the average value of the euro and British pound is still higher than it was in the third quarter of 2013. Accordingly, we wouldn’t expect US companies with exposure to those currencies to cite the dollar’s strength as a real drag on third quarter results.
We would, however, expect them to suggest ongoing strength in the dollar will be a headwind in the fourth quarter. To that end, bear in mind that the US Dollar Index averaged 80.39 in the fourth quarter of 2013 and 80.36 in the first quarter of 2014.
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With the euro dropping to a 22-month low today against the greenback, it’s little surprise to see companies like McDonald’s (MCD), Philip Morris International. (PM) and Pall (PLL), which derived more than 40% of their revenue from Europe over the last 12 months, put in some lackluster showings.
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