The US dollar’s plunge may be preventing Americans from taking that European vacation this summer, but it could be the very thing saving their 401(k) retirement accounts from buckling.
Some of the US’ biggest corporate powerhouses — across all industries — have used the greenback’s retrenchment to shield themselves from slumping profit margins. Declines against world currencies make US products look cheap overseas and translate into big returns when sales are converted back into dollars.
Take Coca-Cola Inc, for example. Buying a can of Coke cost US$1 in the US, but the equivalent of about US$2 in the UK — one reason the beverage giant was able to sail past Wall Street profit projections earlier this week.
And they aren’t alone: IBM, Google Inc, Caterpillar Inc, and eBay Inc all rallied this week because of strong overseas profits.
“If you look at some of the companies that had good quarters, they’re doing half or more business abroad,” said Phil Orlando, chief equity market strategist at Federated Investors. “The weakness in the dollar is a significant benefit in currency translation and for those companies that are developing products that will create a boost for export activity.”
Orlando said that economic growth in the US would slow to about 1 percent this year — down from about a 4 percent last year.
Economists have said that growth is now at its worst rate since the 2001 recession and did not expect things to pick up until the last half of the year.
By comparison, countries in Europe and along the Pacific Rim are showing robust growth. And many companies, like IBM, have even adjusted their strategy to focus more of the business in areas like China and Brazil to take advantage of the situation.
The dollar is down about 8 percent against the 15-member euro and has touched lows against the yen and British Pound. One reason for the slide is that the US Federal Reserve continues to lower interest rates — and that makes the dollar less valuable.
Atlanta-based Coca-Cola reported said revenue jumped 21 percent to US$7.38 billion during the first quarter. It attributed 9 percent of the increase coming from the dollar’s decline against other currencies.
President and chief operating officer Muhtar Kent, who will become Coca-Cola’s next CEO, told analysts he intends to expand the company’s overseas operations to help offset some of the sluggishness in its US operations.
Google surprised Wall Street by delivering a 30 percent rise in profit to US$1.31 billion and marked the 12th quarter out of the 15 since the search engine went public that its performance has topped projections. Sales, excluding revenue passed on to partner sites, climbed 46 percent to US$3.7 billion.
The company said that sales would have been about US$202 million lower without business coming from overseas.
Meanwhile, Caterpillar said strong international sales of the company’s bulldozers and other heavy construction equipment overcame weakness in North America. Sales grew by 30 percent outside of the US and represented 58 percent of total revenue.
Some economists believe this boost to big companies’ earnings will not last too long. Much of the dollar’s recent slide is because interest rates have fallen since last year — and there is speculation the Fed might soon signal an end to rate cuts.
The Fed has cut interest rates by three percentage points since the middle of September — and some economists project they will lower rates by a quarter-percentage point when it next meets on April 30 and hold it there until year end.
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