|Does the Strong
by Jim Surowiecki
NEW YORK, N.Y. (May 5, 1997) -- There were small but important sections
tucked away in the earnings reports issued this quarter by 3M (NYSE: MMM) and IBM (NYSE: IBM). These sections, on the effects of exchange
rates, showed two things: first, that the strong dollar is cutting into corporate
profits; and second, that it's not cutting into them as dramatically as a
lot of people have expected. If 3M and IBM are at all indicative, corporations'
adjustments to the new global currency order have been rather smooth. The
question for investors, though, is how long that adjustment can last, and
if its effects are permanent.
That new order, of course, is founded upon an almost overpoweringly strong
dollar. A year ago, a dollar could be bought in Japan with close to 100 yen.
Today, you'd need 126 yen to buy that dollar. And the greenback is similarly
strong against the Deutschmark and the franc.
A strong dollar hurts corporations in three ways: it makes foreign earnings
less valuable; it raises the price of U.S. goods abroad; and it lowers the
price of imported goods, making it harder for domestic producers to compete.
In order to combat these effects, major corporations have substantial currency
trading departments that try to hedge against precipitous rises and falls
in currency prices. Although most companies don't separate out their profits
from trading, there are certain places where currency departments bring in
a sizable share of earnings in a good quarter.
Still, even the best hedgers have a hard time combating a nearly two-fold
rise in prices. For some time now, analysts have been expecting the dollar
to take a major bite out of corporate earnings, particularly in the case
of the large multinationals. The strong dollar has helped fight inflation
at home. It would make sense that it would also have effects abroad.
Part 2, How 3M and IBM Did