Saqib Ahmed Iqbal

NEW YORK, (Reuters) – U.S. businesses are intensifying efforts to safeguard their profits against a constant rally in the dollar as it surges to multidecade highs.

A hawkish Federal Reserve has helped to boost the dollar’s safety-haven appeal. The dollar also grew by 15% against a basket currencies in the last year.

GRAPHIC: Soaring dollar https://fingfx.thomsonreuters.com/gfx/mkt/lbvgnyanxpq/Pasted%20image%201652202820561.png

This surge in profits has hurt multinational U.S. companies that convert foreign currencies into dollars. It also raised concerns about rising inflation and an uncertain economic outlook, prompting some corporations to actively look for ways to hedge their income.

Companies citing currency headwinds in their latest earnings reports include Coca-Cola (NYSE:) Co, Procter & Gamble (NYSE:) and Philip Morris International Inc (NYSE:). The analysts are now expecting 5.6% profit growth for the second quarter, down from 6.8% in April.

Karl Schamotta (chief market strategist, Corpay), stated that corporations have been compelled to act by the untrammeled dollar’s rise and the breaking down of psychological barriers at most major exchange rates.

After rising by 13% and 88% against each of the currencies, the dollar now stands at an almost two-decade-high against the Japanese currency and more than five years against the euro.

Companies use various kinds of hedging strategies. Options and forwards are both options.

Although industry-wide data is scarce to determine how U.S. companies are hedging their decisions due to the dollar’s large advances, many FX advisory firms have noted an increase in hedge activity.

One of our corporate clients that has a set hedging policy uses a percentage range to determine how much exposure is to be hedged. We’re seeing clients who are on the upper side of that band,” John Doyle from Monex USA, vice-president of dealing and trading.

Monex clients’ hedging activity rose 22% in March 2022 over 2021 and 24% for their first quarter, Doyle stated.

Following years of relatively low volatility in FX, when currency fluctuations were not a significant factor in company earnings, there is an urgent need to be vigilant about adverse changes in exchange rates.

According to Kyriba, the negative effects of currency fluctuations on North American company’s third-quarter results in 2021 fell to their lowest levels since 2018’s first quarter.

Foreign exchange volatility increased late last year as investors processed a Fed hawkish turn. The Fed has raised interest rates 75 basis points in March. In 2022, the market is pricing another 190 base points in rate increases.

The euro’s and yen’s three-month volatility against the dollar is at its highest level since June 2020.

GRAPHIC: Euro-U.S. dollar volatility at 2-year high https://graphics.reuters.com/USA-STOCKS/zdvxogblapx/chart.png

Volatility is rising and “we’re already seeing companies re-tune their forecasts to have 2%, or even more, additional earnings impact than they had expected even quarters ago,” Bob Stark from Kyriba, global head market strategy.

However, not all recent hedge activity was intended to guard against dollar advance.

Corpay’s Schamotta stated that dollar sellers include importers, who have seen an increase in their buying power due to the strengthening currency.

The dollar’s rising value has also been good news for smaller or younger firms. This includes start-ups as well as companies that are looking to become public. They tend to have higher foreign expenses than revenues.

Silicon Valley Bank serves young companies and its corporate clients have seen a large increase in their currency strength, stated Ivan Asensio from FX risk advisory.

Asensio explained that “Regardless the direction of travel, however, there are higher chances of volatility which has increased hedging activity awareness and dialogue.”