If you listen to the earnings calls of major multinational corporations (think Apple, Nike, or Microsoft to name a few), you will undoubtedly hear reference to the impact of movements in the US dollar on their earnings. A client asked for a quick explanation of this concept so let’s dive in.

The US dollar remains the reserve currency of the world and for US companies doing business abroad, it is the currency they use to report their financial results. However, as they do business in various countries, the income and expenses derived from international operations are first earned and spent in the foreign currency. As a result, in order to report at a consolidated level, foreign profits are converted back into US dollars. This is where the relative strength of the US dollar to foreign currencies comes into play.

If the US dollar is strengthening during a particular reporting period, that means that the US dollar is increasingly worth more than foreign currencies. Said another way, foreign currencies are able to purchase less US dollars. As a result, a strong US dollar can slow international sales (as foreign countries can afford less relatively speaking). Further, when American companies convert their profits are back to US dollars for reporting, a strong US dollar results in less profit being reported (as the converted value is lower with a strengthening dollar).

If the US dollar is weaking against foreign currencies, the opposite is true. Foreign currencies are able to purchase more US dollars, potentially resulting in more foreign profits and a higher converted value being reported by the US company.

Does this mean that a weak US dollar is preferred? The answer is nuanced (of course) but no – there are clear advantages to a strong US dollar – even if it can present headwinds to multinational companies.

Perhaps most importantly, a strong US dollar has been an indicator of the strength of the US economy and the demand for our products and financial assets. A strong US dollar also helps the US consumer, as they have increased purchasing power, easier time importing goods, and face lower inflationary pressures. Further, most multinational US companies have considerable US profits, so a healthy US economy and consumer helps with their domestic earnings strength. Lastly, since most commodities are priced in USD, a stronger dollar leads to lower commodity prices and lower input costs.

There you have it – a quick overview of the impact on US dollar movements!