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U.S. exporters find a dollar sweet spot

The U.S. dollar has long had a cachet as a safe haven.

BEAWIHARTA

Even as the mighty greenback is being laid low, the plunging U.S. currency is providing a major boost to some of the world's biggest companies and the stock market.

The U.S. dollar fell to its lowest level since August, 2008, on Thursday. The latest losses have extended a lengthy bearish run for the greenback, which has shed more than 15 per cent of its value in foreign exchange markets in the past nine months.

The slumping dollar is being dragged down by fears over U.S. government debt, inflation and a fragile economic recovery. But its fall is undeniably happy news for the profit outlook of many major U.S. companies and for equities. The Dow Jones industrial average finished Thursday at 12,505.99, its highest level since the financial crisis, as the falling currency opened another window to gains for major U.S. exporters.

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Strong economic growth in developing countries in Asia and elsewhere is helping to ignite a revival in the global manufacturing sector. U.S. companies that make technology, consumer goods and industrial products are benefiting from that: The limp greenback is making American exports more competitive and increasing the U.S.-dollar value of the money they earn overseas.

"The big multinationals are getting a double benefit - from both currency gains and stronger growth in foreign markets," said Scotia Capital strategist Vincent Delisl e in Montreal. He said the combination of healthy economic growth and a weak greenback represents "a sweet spot" for U.S. profit growth.

Sales made by U.S. companies in foreign markets go up when the U.S. dollar goes down, because sales numbers get converted into U.S.-dollar terms when the companies do their financial reporting.

For U.S. companies that derive large portions of their revenues from foreign operations, a weaker U.S. dollar means a substantial upside to their sales numbers - and, in many cases, to their profit margins and bottom lines, as many of their costs are incurred domestically.

"It's definitely a boost to those companies that have large foreign exposure," said John Butters, senior earnings analyst at FactSet Research Systems, an independent investment research firm in Norwalk, Conn.

The effect was evident in first-quarter earnings reports this week from some of the biggest names on the U.S. stock market. Companies as diverse as IBM , Johnson & Johnson and E.I. du Pont reported that currency gains were substantial contributors to their strong increases in overseas revenues.

Nearly one-third of S&P 500 revenues come from non-U.S. sources. Peter Gibson of CIBC World Markets points out that roughly one-fifth of the companies on the S&P 500 are what he calls "value-added exporters" - U.S. multinationals who get more than half of their revenues from outside the U.S.

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These companies, he said, have been the key drivers behind the surge in U.S. earnings growth in the past year. S&P 500 profits have recovered to their pre-recession peak, while profit margins are at five-year highs. "If I were to take those value-added exporters out of the S&P 500, you have essentially no profit growth." He said that as long as the degeneration of the U.S. dollar keeps fuelling the value-added exporters, "I think that this is a theme that's going to continue for years."

Analysts said the U.S. sectors that stand to benefit the most from the weaker currency because of their large exposure to foreign markets are consumer goods, information technology, industrials, energy and materials.

The latest depths of the U.S. dollar may prove short-lived. Analysts speculated that some clarity on the direction of monetary policy from the U.S. Federal Reserve Board could trigger a rapid reversal. But Mr. Butters of FactSet noted that even without dollar-related gains, U.S. companies with large foreign exposure have been seeing solid gains, benefiting from the better pace of growth in many developing economies.

"The currency is just an added bonus. I'd be more concerned [about a reversal in the dollar]if growth was flat to negative, and the currency gains were the only thing making them positive."

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About the Author
Economics Reporter

David Parkinson has been covering business and financial markets since 1990, and has been with The Globe and Mail since 2000. A Calgary native, he received a Southam Fellowship from the University of Toronto in 1999-2000, studying international political economics. More

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