Weak Dollar Pumps Corporate Results, For Now

Summary

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WSJ Your Money Briefing — Episode Summary

Episode Title: Weak Dollar Pumps Corporate Results, For Now
Date: April 30, 2018
Host: J.R. Whalen
Guest: Ben Eisen, Wall Street Journal reporter

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Episode Overview

This episode unpacks how recent movements in the US Dollar—specifically, its weakening over the past year—are impacting US corporate earnings, international business dynamics, and, ultimately, investors’ stock portfolios. Host J.R. Whalen interviews WSJ reporter Ben Eisen to clarify the mechanics of currency fluctuations, the effect on consumers and companies, and what rising or falling currencies mean for future corporate profits.

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Key Discussion Points & Insights

1. Understanding Currency Fluctuations

• Currencies are always in motion:

  • The US Dollar’s value is measured against other global currencies, and these values shift daily.
  • “They [currencies] go up and down every single day. And that matters for everyone from consumers to companies.”
    — Ben Eisen (02:16)

• Recent Dollar Performance:

  • Over the last year to year and a few months, the US Dollar has weakened, declining about 5% compared to a year ago.
  • For major currencies, a 5% fluctuation is substantial and can have broad economic effects.
  • “A 5% move is pretty big... It's been something that people have definitely taken note of.”
    — Ben Eisen (03:22)

2. Everyday Impact on Consumers

• Travel Becomes Pricier:
  • A weaker dollar means Americans vacationing in Europe get less value when exchanging their money—things like hotels, meals, and shopping become more expensive.
  • “It’s more expensive for you to go on vacation because you’ll be paying a bit more.”
    — Ben Eisen (02:58)

3. Corporate Impact: A Boost for US Companies

• US Exporters Benefit:

  • US companies selling goods abroad see their products become more affordable for foreign buyers, leading to potential increases in international sales.
  • “Their products become cheaper for those buyers... That’s something that can boost sales.”
    — Ben Eisen (03:46)

• Caveat:

  • While beneficial, currency-driven sales boosts are not the sole driver of results but are increasingly influential with larger swings.

4. Dollar’s Recent Rebound

• A Shift in Trend:

  • After a prolonged drop, the dollar has strengthened about 2% over the past month.
  • Factors: Stronger US economy, expectations of faster Federal Reserve rate hikes, and possible upticks in inflation.
  • “All these factors tend to drive the dollar. And that's what you're starting to see bounce back.”
    — Ben Eisen (04:29)

• Timing Matters:

  • Companies are reporting earnings that reflect the weak-dollar period, but if the dollar continues to rise, future results may look different.

5. Looking Ahead: Risks & Strategies

• Potential Headwind for Future Profits:

  • Further dollar strength poses a “headwind” for US companies’ foreign earnings and is something investors need to watch closely.
  • “If it rises as much as it’s fallen in the past, it's something that companies will definitely have to be paying attention to.”
    — Ben Eisen (05:13)

• Corporate Hedging:

  • Companies may turn to currency hedging to manage this increased risk.

• Investor Takeaway:

  • “It’s a good reason to keep an eye on currencies.”
    — J.R. Whalen (05:01)

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Notable Quotes & Memorable Moments

• Ben Eisen (02:16):
  “They [currencies] go up and down every single day. And that matters for everyone from consumers to companies.”

• Ben Eisen (03:22):
  “A 5% move is pretty big... It's been something that people have definitely taken note of.”

• Ben Eisen (02:58):
  “It’s more expensive for you to go on vacation because you’ll be paying a bit more.”

• Ben Eisen (03:46):
  “Their products become cheaper for those buyers... That’s something that can boost sales.”

• Ben Eisen (04:29):
  “All these factors tend to drive the dollar. And that's what you're starting to see bounce back.”

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Timestamps of Important Segments

• 00:33 — Main theme introduction: how the weak dollar impacts stocks
• 02:16 — Explanation of currency fluctuations and their significance
• 02:58 — Consumer perspective: travel and exchange rates
• 03:22 — Discussion of the dollar’s notable drop
• 03:46 — How weak dollar benefits US companies abroad
• 04:29 — Reasons for the dollar’s recent rebound
• 05:01 — The importance of monitoring future dollar movements and implications for investors
• 05:13 — Currency hedging and outlook for corporate profits

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Summary Takeaway

A weakening US Dollar has recently supported higher profits for US-based multinational companies by making their overseas sales more valuable when converted back into dollars. However, the dollar’s new upward movement could reverse those gains, making it essential for investors to monitor this key macroeconomic variable—and for companies to manage the risks.
“It’s a good reason to keep an eye on currencies.”
— J.R. Whalen (05:01)

Transcript

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[J.R. Whalen]

Money in market stories from the Wall street journal. I'm J.R. whalen in New York. How does a weak dollar impact your stock portfolio? We'll break it down in a moment. First, these money headlines the Wall Street Journal heard on the Street Team reports Americans are making more money but spending less of it. With a tightening labor market making it harder to hire and keep workers, companies are starting to issue bigger paychecks. Labor Department on Friday reports the Employee Cost Index, its comprehensive measure of pay and benefits, was up 2.7% from a year earlier. That was its biggest gain since 2008. That increase, by the way, does not reflect the extra money many people are taking home as a result of the tax cut. But more cash coming in the door hasn't translated to more spending. Friday's gross domestic product report from the Commerce Department showed the economy grew at a 2.3% rate in the first quarter, but the that consumer spending grew just 1.1%. That's its weakest reading in nearly five years. And the journal's Real Time Economics team takes a look at how the tight labor market is driving up prices. They focus on a hair salon chain and how low unemployment drives up competition for workers. And the salons are forced to raise wages to lure or retain staff. But economists are puzzled as to why other sectors are not also significantly raising wages. See the full [e-mail] this is your Money briefing from the Wall Street Journal. Welcome back, everybody. One of the economic factors driving the stock market is strong corporate earnings. And Wall Street Journal reporter Ben Isen is here to discuss how the weak US Dollar is playing a big role in that scenario. So, Ben, just explain to us how currencies are weak and strong against each other.

[Ben Isen]

So you have the US Dollar and the dollar has a value relative to every other currency in the world. And they're always fluctuating. They trade back and forth and they go up and down every single day. And that matters for everyone from consumers to companies. When you think about going to Europe and you have to change your dollars into Euros, it's done based on the going exchange rate. And recently You've had the dollar has been weaker. It's been falling over the last about year and a half or a year and a few months. And that's, you know, once it's fallen for that stretch of time, it really starts to impact companies.

[J.R. Whalen]

So let's say you're going on vacation to London and you give the currency exchange clerk 100 dol and it's a weak US dollar. How will that translate to what you get in return?

[Ben Isen]

That means that your dollar is going to be getting less euros. Each one will be worth less relative to the euro. All in all, it's more expensive for you to go on vacation because you'll be paying a bit more.

[J.R. Whalen]

You mentioned the fact that over the past year or so the dollar is down nearly 5% as compared to about 12 months ago. Is a 5% drop traditionally seen as a significant move?

[Ben Isen]

Yeah, I mean, currencies are typically fairly stable, especially the currencies in the sort of most developed markets. You have the dollars, the world's reserve currency. So a 5% move is pretty big. And then when you look at this over a longer stretch of time, going back to the beginning of last year, falls even more. So, yeah, it's been something that people have definitely taken note of.

[J.R. Whalen]

So how is this benefiting US Companies who are doing business overseas?

[Ben Isen]

Yeah, so companies that have a lot of international sales, basically they sell a lot of their products to buyers that live elsewhere, places like Europe, and as their products become cheaper for those buyers. So think of someone living in Paris that wants to buy a Ford, something that's priced in dollars, being converted into euros makes it cheaper because of the euro's relative strength. That's something that can boost sales. It's not the main factor driving sales, but it's something that you definitely start to see show up, especially when the dollar falls as much as it has.

[J.R. Whalen]

And as they say, as some people say, what goes down must go up. The dollar has actually climbed 2% just this month. What's behind that?

[Ben Isen]

You've got a lot of factors. You've got the economy continuing to strengthen. You've got the Fed looking like it might raise rates faster, or at least people starting to think they could. If inflation picks up, all these factors tend to drive the dollar. And that's what you're starting to see bounce back. But notably, this bounce back in the dollar has really started just over the last month. So. So when we look at companies that are reporting financial results, they're reporting it during a period in which the dollar has been falling and then only since that period has ended has the dollar bounced back.

[J.R. Whalen]

And the folks you spoke to for your article, they see this going forward as a headwind to corporate profits and it could actually put a crimp in the profits. And so for investors, it's a good reason to keep an eye on currencies.

[Ben Isen]

Definitely. We'll have to see how this looks going forward. You've seen the dollar rise about 2% over the last month, but it could rise more. And if it rises as much as it's fallen in the past, it's something that companies will definitely have to be paying attention to. You start to see companies try to hedge changes in the currency and factors like that. And that's something that we could see going forward.

[J.R. Whalen]

Well, it's a good reason to keep an eye on the markets team and the currencies team here at the Wall Street Journal to follow along, that's Wall Street Journal reporter Ben Isen joining us here in our studio. Ben. Ben, thanks for being with us.

[Ben Isen]

Thank you.

[J.R. Whalen]

And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.

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