How a Strong Dollar Hits Microsoft, Other Big U.S. Companies

Microsoft Corp.

MSFT 0.37%

on Thursday cut its guidance on sales and earnings, citing the US dollar’s rise in the foreign exchange market. Here’s why the dollar has rallied so much this year and what that means for companies and stocks.

The US Dollar Index, which tracks the currency against a basket of other currencies, has gained about 13% over the past year, defying strong inflation to reach levels not seen since the early 2000s.

This is partly because investors around the world have been drawn to the US as a source of relative economic strength and stability. Russia’s war in Ukraine and the rise of China’s Covid-19 have roiled markets, affecting supplies of key commodities and lifting energy prices in a threat to economies around the world. all over the world.

When investing in US stocks and bonds, foreigners often have to use dollars, which increases the currency’s price.

What are the consequences of a stronger US dollar?

A stronger national currency has benefits and limitations for the country that issues it. On the plus side, Americans are seeing their money go further as they buy goods and services from abroad. Imports become cheaper. A cup of espresso in Paris or a bowl of noodles in Tokyo costs less, in dollars, than it used to.

On the other hand, a stronger dollar means American products are more affordable to foreigners. That makes it harder for people from other countries to visit the United States, hurting hotels and other tourist-dependent industries. At the same time, the strength of the dollar also cuts international sales to all types of American businesses.

Why does Microsoft suffer?

As a global supplier of everything from office software and cloud computing services to laptops and video game consoles, Microsoft derives most of its profits from abroad. For the most recent fiscal year, the company’s pre-tax foreign income was $36.1 billion, compared with $35 billion domestically. That dominant share of international business means a stronger dollar will weigh on the company’s operations.

In April, the rising dollar topped as a concern. Microsoft’s CFO, Amy Hood, told analysts that in the latest fiscal quarter, the foreign exchange impact reduced the company’s sales by $302 million. Total revenue for the quarter was $49.4 billion.

On Wednesday, Microsoft raised another red flag on the impact of dollar strength, dampening its revenue and profit outlook. The company told investors it expects the forex moves to slash sales by $460 million more than previously predicted in the current quarter. Microsoft warned profits would also be affected.

What are other companies saying?

A series of US companies that sell products abroad are facing a similar situation. Other tech companies are a prime example. Salesforce Inc.

cited dollar strength this week as it slashed its annual sales outlook, doubling its estimate of the expected currency’s impact on revenue to $600 million.

Pharmaceutical companies that sell drugs and health products on the international market are also affected. At the end of April, the pharmaceutical company AbbVie Inc.

said the foreign exchange impact shrank sales by 1.3% in the first quarter of this year – and that was before the dollar rallied to recent highs last month. For the full year, AbbVie forecasts that a stronger dollar will affect revenue by 1.4%.

Manufacturers with large export markets are also another potential victim. Last month, Deere & Co.

a manufacturer of agricultural and construction equipment, also warned a stronger dollar would likely hurt its sales.

What other businesses are investors watching?

Companies with large foreign revenues have been dominating the stock market.

The S&P 500’s Foreign Sales Exposure Index is down about 17% so far this year, compared with a 13% drop for the S&P 500 index. Meanwhile, the S&P 500 US Revenue Exposure Index, including companies that are more dependent on domestic sales, lost only 7%.

Among the big names in the index with more exposure to foreign money: Microsoft, Apple Inc.

Alphabet Inc parent of Google.

chip maker Nvidia Corp.

Tesla Inc. Inc.

and Meta Platforms Inc.

, the parent company of Facebook. Other key players include pharmaceutical maker Johnson & Johnson and credit card company Mastercard Inc.

The US sales index, on the other hand, suggests some company names could be more quarantined. Those include the health insurance company UnitedHealth Group Inc.

and telecom giant Verizon Communications Inc.

Major US-focused retailers like Home Depot Inc.

and Walmart Inc.

make that list as well.

Write to Matt Grossman at

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