The hit the United States’ big international companies took from the dollar in the first quarter really is a payback for the boost they got when the greenback was weaker.LEE JAE-WON/Reuters
If Caterpillar Inc. chief executive Doug Oberhelman wasn't paid some $17-million (U.S.) in 2014, you'd feel sorry for him. His company is taking it from all sides and there apparently is nowhere to hide.
"We are seeing a very competitive marketplace right now," Mr. Oberhelman told analysts on a conference call after the release of the company's first-quarter results. "I will tell you, with a yen that's off over 50 per cent in three years, euro, Brazilian currency, pound currency off 20 per cent to 30 per cent in the last year; you know all of our competitors aren't in the U.S. So it really is a competitive environment out there …"
Always the currency.
The stronger dollar cost Caterpillar $342-million in the first quarter because international sales in Europe, Asia and Latin America were worth less when the Peoria, Ill.-based company converted them into greenbacks.
Caterpillar isn't alone. General Motors Co. and Ford Motor Co. each saw revenue decline more than $1-billion from year-ago levels because of the exchange rate. Pfizer Inc. also took a beating because of the dollar's gain. American multinationals had reported more than $20-billion in revenue shortfalls attributable to the shift of exchange rate through the end of April, according to the Financial Times.
That's real money. So what is to be done? The answer: not much. The world's economic powers decided decades ago that a system of fixed exchange rates – while certainly conceivable – was more than any politician could uphold. They decided the best they could do would be to let their currencies float, and let market forces determine exchange rates. Sometimes you are up, sometimes you're down. The exchange rate is a cost of doing international business. Period.
But currencies captivate the public's imagination in way that wage rates and utility bills do not. We in the business press can't seem to write enough about the foreign-exchange market. That obsession crowds out deeper analysis of economies and companies.
Take Caterpillar. Mr. Oberhelman emphasized exchange rates. But at least as significant was weak demand for his shiny yellow bulldozers, backhoes and mining equipment. Caterpillar's sales were down in Asia, Europe and Latin America. The one place they were higher: North America, the company's backyard.
For all the anxiety Mr. Oberhelman apparently feels over the stronger dollar, surely he would recognize that he currently has a massive advantage over his competitors: Caterpillar's home market is growing.
That strong North American demand is why the U.S. dollar is such a talking point this earnings season. The U.S. economy is one of the few with solid forward momentum. As a result, the Federal Reserve is running out of reasons to leave its benchmark interest rate at the emergency setting of zero. U.S. assets look relatively attractive, and therefore there is demand for the currency needed to purchase them.
All things equal, a stronger dollar will help to rebalance global economic growth by "sharing" that U.S. demand with the rest of the world.
The U.S. Commerce Department's preliminary estimate of gross domestic product in the first quarter showed economic growth essentially stalled. One of the reasons was a 7.2-per-cent decline in exports, only the third quarterly drop since at least 2011. The dollar's steady climb was a big reason for the decrease. Exporters earned less on the contracts they had in place and likely lost business because international competitors had a currency advantage. Trade, which helped tug the United States out of recession when the dollar was weaker, became a drag on growth as the business cycle started to mature.
The beauty of a system of flexible exchange rates is that it is self-adjusting. Now that the United States has started to "share" its demand, the process of readjustment has begun. As it became evident the United States no longer was getting a boost from trade, the Fed changed course, making clear that it can wait to raise interest rates until later in the year. An economy that stalled in the first quarter is less attractive than one that was growing at an annual rate in excess of 4 per cent, as the United States was in the middle of last year. The dollar was on its longest losing streak since 2011.
So the hit the United States' big international companies took from the dollar in the first quarter really is a payback for the boost they got when the greenback was weaker. European and Asian economies are being given a chance to catch up. This ultimately will be good for companies such as Caterpillar as they replace some of the foreign-exchange losses with new orders from places other than home.
Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.