Wild Currency Swings Take a Bite from Company Profits

A surging dollar and weakness abroad whacked North American corporate profits by an unprecedented amount in the second quarter, foreshadowing an even worse hammering this earnings season.

Currency volatility cost North American companies $34.3 billion in the April-to-June period, the highest loss on record in data going back to 2013, according to Kyriba Corp.

There are already signs that the third-quarter earnings season could be even worse, as the U.S. dollar is expected to remain strong and the risk of a global economic slowdown becomes clearer. The Bloomberg dollar index reached a record high last month.

The impact of the greenback’s strength has been most apparent in U.S. companies that derive a chunk of their revenue overseas and are exposed to a weaker global consumer, with Domino’s Pizza Inc. and PepsiCo Inc. already warning that foreign exchange (FX) rates will take a larger-than-expected bite out of earnings.

“The extremely strong dollar and bad economies in Europe and China weigh on foreign demand for U.S. goods,” said Bill Adams, chief economist at Comerica Bank.

Swings in the ruble, Canadian dollar, and euro were cited the most during second-quarter earnings calls among public companies with business overseas, according to Kyriba’s analysis. Volatility in those currencies has been wreaking havoc across markets amid energy-supply disruptions from Russia’s war in Ukraine and softening global growth.

And currency risk is showing few signs of slowing. JPMorgan Chase & Co.’s index of implied global FX volatility, which is based on options-market pricing, is lingering near its highest since Covid-19 shuttered cities in early 2020.

The surging dollar is likely to hit the hardest in industries that are waiting to report earnings, such as technology and materials, which derive the bulk of their sales overseas, data compiled by Bloomberg show. Given the heavy market weighting toward tech giants like Apple Inc. and Alphabet Inc., which generate more than half of their revenue outside of the United States, earnings may get dinged further in the coming weeks.

“Multinational corporations with a major FX hit are likely to see bottom-line value, or earnings per share, go down,” Wolfgang Koester, senior strategist at Kyriba, said in a statement. “Companies not monitoring and managing their FX exposures with modern industry best practices will be the ones reporting impacts during earnings calls.”

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