Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your experience. Save up to 40% More details

Analysis: Dollar's surge spurs currency hedging by U.S. companies

Economy May 11, 2022 02:10AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
© Reuters. U.S. dollar notes are seen in front of a stock graph in this November 7, 2016 picture illustration. Picture taken November 7. REUTERS/Dado Ruvic/Illustration/Files

By Saqib Iqbal Ahmed

NEW YORK (Reuters) - U.S. companies are ramping up efforts to protect their profits from a relentless rally in the dollar, as the greenback surges to multi-decade highs.

The dollar has climbed about 15% against a basket of currencies over the last year, helped by a hawkish Federal Reserve and heightened geopolitical tensions that have boosted the greenback's safe-haven appeal.

GRAPHIC: Soaring dollar

That surge has reduced the profits of U.S. multinational companies that convert foreign currency into dollars, adding to corporate worries over soaring inflation and a murky economic outlook and pushing some to more actively seek ways to hedge their earnings.

Companies citing currency headwinds in their latest earnings reports include Coca-Cola (NYSE:KO) Co, Procter & Gamble (NYSE:PG) and Philip Morris International Inc (NYSE:PM). More broadly, analysts have lowered their overall forecast for S&P 500 second-quarter profit growth to 5.6% from 6.8% at the start of April.

"Corporates have been spurred into action by the dollar's untrammeled rise - and by the breaking of psychological barriers in most major exchange rates," said Karl Schamotta, chief market strategist at business payments company Corpay.

The dollar stands at a two-decade high against the Japanese yen and a more than five-year high against the euro, after rising 13% and 8% respectively against the currencies this year.

To prevent big exchange rate moves from creating big swings in earnings, businesses are using various types of hedging strategies, including those that employ forwards and options.

While little industry-wide data are available to gauge how U.S. companies' hedging decisions are being driven by the dollar's big advances, several firms that advise companies on managing FX risk note a rise in hedging activity.

"Some of the corporates we work with that have a set hedging policy have a percentage band as to how much of their exposure they are supposed to have hedged. We are seeing those clients move to the high side of their band," said John Doyle, vice president of dealing and trading at Monex USA.

Hedging activity by Monex's clients rose 22% uptick in March 2022 versus 2021, and was up 24% for the first quarter compared with last year, Doyle said.

The urgency to guard against adverse exchange rate moves comes after years of muted FX volatility, during which currency fluctuations had limited impact on company earnings.

The negative impact of currency fluctuations on North American companies' third-quarter 2021 results fell to the lowest level since the first quarter of 2018, data from treasury and financial management firm Kyriba showed in early February.

But foreign exchange volatility picked up late last year, as investors digested a hawkish turn at the Fed, which has already raised interest rates by 75 basis points since March. Markets are pricing in another 190 basis points of rate hikes in 2022.

Three-month volatility for the euro and the yen, against the dollar are at their highest since June 2020.

GRAPHIC: Euro-U.S. dollar volatility at 2-year high

As volatility picks up, "we are already seeing organizations re-adjusting their forecasts with 2% or more additional impacts to earnings than what they expected even a quarter ago," said Bob Stark, global head of market strategy at Kyriba.

Not all recent hedging activity has been aimed at protecting against the dollar's advance.

Dollar sellers, including importers who have enjoyed a boost in their purchasing power from the stronger currency, have rushed to lock in gains, Corpay's Schamotta said.

At the same time, the dollar's rise has been a boon to younger or smaller firms, including start-ups and companies looking to go public, as they tend to have more foreign costs than revenue.

Corporate clients at Silicon Valley Bank, which serves younger companies, have largely benefited from the stronger U.S. currency, said Ivan Asensio, head of FX risk advisory at the firm.

"Regardless of direction, however, the prospects of higher volatility has heightened hedging activity, awareness, and dialogue," Asensio said.

Analysis: Dollar's surge spurs currency hedging by U.S. companies

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
Sign up with Email