Signs of a strengthening U.S. dollar should be good news, right? Alas, for investors, a weak dollar actually has its benefits.
We live in an increasingly global economy, with many major U.S. corporations deriving a substantial chunk of their revenue from foreign countries. McDonald's (NYSE:MCD), Coca-Cola (NYSE:KO), and Citigroup (NYSE:C) take in more than half their revenue from abroad, with the Golden Arches' European revenue alone outpacing its U.S. sales. Even Yahoo! (NASDAQ:YHOO) generates about 30% of its revenue abroad.
Since that money comes to these companies in other currencies, the weaker the dollar against those denominations, the bigger the pile of greenbacks U.S. businesses can report once those foreign funds get converted into legal tender. In short, the weak dollar of recent years has made many domestic companies' earnings stronger.
But now the dollar is gaining strength, which could squeeze profits for big global players. Already, companies such as Oracle (NASDAQ:ORCL) and Research In Motion (NASDAQ:RIMM) are reporting results at least slightly lower than they'd hoped, and partly blaming a rising dollar for the shortfall.
The news isn't all bad, though. Many international enterprises take hedging steps to protect themselves to some degree from currency exchange risks -- locking in some exchange rates via contracts, for example. This is not unlike how Southwest Airlines (NYSE:LUV) has profited by locking in fuel prices.
A strong dollar can also help some companies; if they buy many products or services internationally, they'll get more bang for their buck. Companies that do a lot of their manufacturing abroad, or that outsource much of their white-collar work, will find that their dollar goes further now. The results should improve their bottom lines.
Currency effects and other aspects of a global economy can have a major impact on your investments' results. According to one analyst, a 10% increase in the dollar by the end of 2009 could whack 13% off Yahoo!'s valuation. Projections like that may have some investors hoping that, at least for now, the dollar remains the 98-pound weakling of the currency market.
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Longtime Fool contributor Selena Maranjian owns shares of Coca-Cola and McDonald's. Coca-Cola is a Motley Fool Inside Value pick. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.
