Strong Dollar Headwinds Impacting Major Companies, from Amazon to McDonald's

Global firms face challenges as exchange rates affect profits and outlooks / AFP

The U.S. dollar's strength is exerting significant pressure on the earnings of major corporations, from tech giants to consumer goods brands. As the dollar strengthens, companies with substantial international revenue are particularly vulnerable to its effects, especially as global exchange rate fluctuations result in lower foreign income and unfavorable conversion rates.

According to recent data from Yahoo Finance, several prominent U.S. companies have cited the strong dollar as a major factor influencing their fourth-quarter performance and future outlook. Goldman Sachs analyst David Kostin noted that mentions of exchange rate impacts have surged in S&P 500 earnings reports, reflecting the growing concerns of U.S. firms dealing with the dollar's appreciation.

The impact of a stronger dollar is typically felt most acutely by businesses with high overseas sales, as exchange rate fluctuations diminish revenue from international markets. This situation is particularly challenging for major tech companies, many of which rely heavily on foreign income. For instance, Apple reported that 58% of its total revenue in its most recent quarter came from international markets. Other big tech players, including Alphabet (Google's parent company), Microsoft, Tesla, and Meta, also saw over 50% of their revenue come from overseas last year.

One of the companies hit hardest by the dollar's strength is Amazon, the world's largest e-commerce retailer. Amazon, which generates over 23% of its revenue from international markets, has been facing a significant currency headwind, amounting to approximately $900 million in losses, far higher than originally anticipated. Amazon's guidance for the first quarter of this year suggests a modest revenue growth of only 5-9%, potentially marking the lowest growth in the company's history. The company has also forecasted a $2.1 billion loss for the year due to currency fluctuations.

The effects of a stronger dollar are not limited to the tech sector but are also hitting consumer goods companies hard. Fast food giant McDonald's has warned of a negative impact on its annual earnings per share (EPS) due to exchange rate volatility. Coca-Cola has issued a similar forecast, predicting that exchange rate fluctuations will reduce its EPS growth by 6-7%. Johnson & Johnson has also predicted a $1.7 billion loss in revenue for the year due to adverse currency impacts.

The U.S. Dollar Index, which measures the value of the dollar against a basket of six major currencies (including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc), has risen by over 7% since last September, reaching its highest level in two years in January. As of now, the Dollar Index stands at approximately 106.737, maintaining a strong position.

Several factors are contributing to the ongoing strength of the dollar. President Donald Trump's protectionist trade policies, including tariffs on steel and aluminum, have bolstered the dollar. Starting next month, the Trump administration plans to impose a 25% tariff on steel and aluminum imports, which could drive up the value of the dollar further. Additionally, the Federal Reserve's monetary policy, with its potential for delayed interest rate cuts, has provided further support to the dollar. Higher interest rates make the dollar more attractive to investors, further pushing up its value.

Experts on Wall Street believe that the combination of Trump’s protectionist trade policies and the Fed's interest rate decisions could sustain the dollar's strength for the foreseeable future, potentially putting continued pressure on global companies with significant international revenues. Goldman Sachs has forecast that the dollar could appreciate by an additional 3% over the next 12 months, driven by strong U.S. economic growth, solid asset returns, and tariff threats. As a result, global companies may continue to face challenges in the face of this long-term dollar strength.