Coke, Pepsi and the Rising Dollar
The strong dollar has been taking its toll on U.S. corporate profits, especially for those companies who sell their products abroad, as The Associated Press reports today. Coca-Cola and Pepsi both reported falling sales directly linked to the exchange rate, and companies like Avon and Yum brands have also said the dollar has hurt their bottom lines. That, in turn, is likely to take its toll on investors who hold equity in these companies.
The dollar has increased by 18 percent over the last 12 months, when compared to major world currencies, the AP reports. When a U.S. firm sells its products in a foreign market, it receives less value from selling at the same price when the dollar strengthens against the local currency. They can raise local prices to make up the difference, but that can discourage buyers and hurt sales.
When the dollar rises against the Euro, according to the AP story, “it hurts in two ways: Prices of American-made goods become more expensive to customers in Europe, and goods that move off foreign shelves translate into fewer dollars, showing up as lower revenues and earnings on quarterly financial reports.” (For another point of view, see Mark Hulbert’s column in MarketWatch).
But the strong-dollar phenomenon isn’t limited to investing and corporate balance sheets. Its impact is felt over the full U.S. economy, for better or for worse. The American Institute for Economic Research will examine how the rising dollar affects the economy in its Business Conditions Monthly report, which it will release next week. In each monthly report, we take a look at various aspects of the economy and capital markets, as well as give our outlook on economic growth and the probability of recession. We will also give our read on inflationary pressures. Stay tuned.
