Strong Dollar May Negatively Affect US Corporations

Continued sovereign debt turmoil in southern Europe and a new Japanese Prime Minister focused on monetary stimulus caused weakness in the Euro and the Yen during the first quarter.  According to Bloomberg, the Yen fell 7.4% versus the dollar and the Euro fell from  $1.32 to $1.28.  Despite the low interest rate environment and the Federal Reserve’s continued quantitative easing program here at home, the dollar has maintained its attractiveness to global investors as a “safe haven.”  This dollar strength presents a challenge to US corporations on multiple fronts.  Sales conducted in the Euro and Yen are worth less when translated back into dollars, pressuring revenue and earnings results.  Competitors domiciled in Europe and Asia can now better compete with US companies on price around the globe.  An example is the auto industry, where a small change in currency values can have large effects on the profitability of an automaker.  In fact, we have already heard comments from Bill Mulally, the CEO of Ford, that a weak Yen will hurt Ford’s profitability. As companies begin to report first quarter results in a few weeks, we will be watching closely for any effects this trend may have on credit quality