Why a rising dollar, relative to other currencies, is not good for U.S. companies doing business internationally?
American Widgets is a U.S. based company doing business internationally, a large portion of which is done in Europe. During the first quarter of 2014, they earned 100,000,000 Euros which translated to $138,850,000.00 in quarter earnings thanks to the EUR/USD exchange rate at the time of 1.3885.
Fast forward to the beginning of 2015 as the European Central Bank embarks on a quantatative easing program, driving down interest rates in Europe and the value of their currency.
American Widgets continues to operate in Europe and again earned 100,000,000 Euros during the latest quarter. However, quarterly earnings this time around translated to $107,380,000.00, a loss of over $30 million. So, although earnings were the same in Euro terms, when translated to dollars, earnings were 22.66 percent lower.
Although this picture particular situation is pessimistic, for most Americans this concern will pass because in the future, the opposite will occur as the dollar depreciates, creating a tailwind for American companies. Thus, unless you’re a CEO of an internationally-active, American-based company, your worries should be limited.
