US Dollar Direction

Euro Slide Leaves CEOs Wringing Hands With Forecasts at Risk

 April 29 (Bloomberg) -- United Technologies Corp. finance chief Greg Hayes sets aside some wiggle room in his profit forecast every year for swings in the euro. By March, half his safety net had already evaporated.
The maker of Otis elevators and Pratt & Whitney jet engines, which gets about a quarter of its sales from Europe, started 2010 assuming a $1.48 euro exchange rate. Hayes cut it to $1.37 last month as concern mounted that Greece would default on its debt. This week, the euro dropped below $1.32 for the first time since April 2009.
“It’s one of those things that you can’t control,” Hayes said in an interview April 23. “In fact, I think our stock is actually down the last couple of days because of this Greece crisis.”
Terex Corp., DuPont Co., McDonald’s Corp. and Johnson & Johnson also said in the past two weeks that the euro’s slide is affecting profit or may hold back growth. The 8.2 percent decline in the currency so far this year makes U.S. exports more expensive and lowers overseas sales when euros are translated to dollars, threatening a potential rebound in revenue and a lift to the economy.
Analysts, who have cut their second-quarter forecast for Europe’s common currency every month this year, expect it to trade at $1.35 in June and $1.32 by December. The euro will weaken to $1.30 by the first quarter of 2011, according to the median of economists’ estimates compiled by Bloomberg.
“U.S. CEOs are going to be doing a lot of hand-wringing over the next couple of quarters,” said Thomas Laming, a money manager with Scout Investment Advisors in Kansas City, Missouri, which manages $10 billion in assets. “There is going to be an impact on U.S. multinationals. It may cause some companies to miss the earnings estimates that are out there.”
DuPont, the third-biggest U.S. chemical maker, is expecting the euro to average $1.34 this year, Chief Financial Officer Nicholas Fanandakis said. Currency exchange added 10 cents to per-share earnings in the Wilmington, Delaware-based company’s first quarter, and that may deteriorate to as little as 5 cents for the year, he said.
“As the dollar strengthens, for us it is a headwind,” Fanandakis said this week in a telephone interview.


It is my expectation that the US dollar is heading considerably higher, perhaps to 88 on the US dollar index in the next few months.  While the economy is not pretty in the US, the trouble in Eurozone and Japan, make it the winner in this fiat currency ugly contest.  

The irony of a stronger dollar, as the article above alludes to, is that it can be a drag on corporate profits.  As the sovereign debt problem in Europe spreads, and the market becomes aware of its severity, I anticipate stock valuations will suffer in the US both from the "fear factor" and lower earnings.