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A resurgent dollar will weigh on the next round of U.S. exporters’ earnings, with the first major reports this week offering a preview of what’s shaping up to be a banner year for the currency.
The dollar went on a tear starting in September, strengthening from above $1.40 against the euro to a 15-month low just below $1.30 by the end of the year. The currency hit a 15-month low below $1.27 on Monday, and Deutsche Bank predicted Monday the currency will fall to $1.20 by June.
The coming earnings season, which kicks off with Alcoa Inc. after markets close on Monday–will be the first to reflect the dollar’s newfound strength.
The more the dollar rises, the worse U.S. exporters fare abroad. When the dollar is strong, it makes goods exported abroad seem more expensive to foreign customers using other currencies. Morgan Stanley estimates that for every 1% the dollar rises broadly against other currencies, corporate earnings take an equivalent hit.
“It’s not really a headwind yet, but it’s becoming one,” said Alexander Young, global equity strategist at S&P Capital IQ.
On Monday, the euro traded at $1.2754. The ICE Dollar Index, which tracks the dollar against the euro and other currencies, traded at 81.059, up about 6% from its 2011 average.
Much of the dollar’s resurgence in the fourth quarter was due to the turmoil in the euro zone, the second-biggest market for U.S. exports after Canada. The region’s sovereign-debt woes drove down the euro, while investors looking to hold a stable-seeming currency bought the dollar.
Several other top destinations for U.S. exports saw steep slides in their currencies against the dollar, including Switzerland.
Companies that sell technology, consumer necessities as well as chemicals and other basic materials are likely to be especially hard hit.
General Motors could be a harbinger of foreign-exchange effects on U.S. companies. In November, GM reported disappointing results for the third quarter based in part on the strengthening dollar. The automaker’s international unit was hit by currency losses as well as demand for cheaper cars abroad, spurred in part by the relative expensiveness of American vehicles as the dollar appreciated.
“If the euro continues to weaken, we expect currency to become more of a drag for U.S. earnings in 2012,” Young said.
Some of those losses could be offset by slides in emerging market currencies like India’s rupee, which dropped about 8% against the dollar in the fourth quarter. U.S. firms tend to operate factories, call centers, or software development units in India, rather than exporting to the country, so the rupee’s fall means the dollar bought more Indian services and salaries during the quarter.
“This benefit would be offset to some extent by profits in local currency translating into fewer [dollars],” said Jonathan Wetreich, a currency strategist at Brown Brothers Harriman.
Other U.S. companies, in particular those dealing in commodities, will be glad to see a stronger dollar. Alcoa, the aluminium maker, reported $241 million worth of negative currency impact for the first three quarters of 2011, due in part to the weak dollar. The company noted that currency became a positive factor for earnings in the third quarter, as the dollar strengthened.
That is because commodities typically are sold in dollars, so Alcoa receives dollars in return for its products, yielding more profits as the dollar rises.
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MarketBeat looks under the hood of Wall Street each day, finding market-moving news, analyzing trends and highlighting noteworthy commentary from the best blogs and research. MarketBeat is updated frequently throughout the day, helping investors stay on top of what's happening in the markets. MarketBeat lead writer Mark Gongloff spearheads the MarketBeat team, with contributions from other Journal reporters and editors. Have a comment? Write to marketbeat@wsj.com or write Mark at mark.gongloff@wsj.com.
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