30th January 2015
The US dollar looks set to record its seventh consecutive month of gains, which would be its best performance since 1971. A round of central bank announcements have seen investors flock to the US dollar as a means to protect themselves from the volatility seen in other currencies, such as the euro and the Japanese yen.
But dollar’s strength has begun to have implications for US businesses and economic growth in the US.
The European Central Bank’s recent announcement that will see the bank flood the market with new money, as it laid out plans to begin quantitative easing, saw the euro fall sharply against most other currencies and particularly against the dollar, where the single currency hit an 11-year low against the dollar.
However, the stellar rise of the dollar has begun to impact the performance of American businesses, especially those that export goods internationally. US exports have become far too expensive for companies from other countries which has reduced demand for American produced goods. It’s caused a number of companies to announce downgrades to their earnings projections, which could have implications for economic growth in the US in 2015.
Procter & Gamble has forecast a 12 per cent drop in after-tax profits in the year to June. The consumer product giant cited the downgrade was due to the “most significant fiscal year currency impact” it’s ever witnessed in its 178-year history.
Microsoft Corp., the computer software developer, announced projected impacts of around four per cent to revenue due to unfavourable foreign-exchange rates.
Pfizer Inc., the pharmaceutical production company, estimated that the stronger dollar could hit its earnings by up to $2.8 billion in 2015, a significant blow to revenue.
A number of other companies will also find their earnings impacted by the slackening global demand for what are increasingly expensive US produced goods.
Some analysts have begun to estimate that GDP growth in the US will slow to around two per cent in the first quarter of 2015, which could be the second month where growth has slowed.
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