Calls for a halt to the dollar’s slide by foreign owners of US assets such as the Chinese and fellow trading blocks like the EU and Japan that are struggling to compete with a weak dollar have been joined by a supporter from an unexpected quarter recently.
Klaus Kleinfeld, chief executive of America’s Alcoa is reported in the FT as saying the aluminum producer took a $57m hit in the third quarter due to the weakening dollar and Levi Straus took a $16m currency hit in the second quarter. While these and other companies like Yum Brands and Biomet reported in USA Today don’t go into much detail about exactly where the losses arose, when corporations are manufacturing in so many locations, Alcoa operates in 31 different countries, local currency movements impact the bottom line when the costs are rolled back in the dollar denominated corporate accounts.
Most of the cost increases are going to come from those countries that have strong currencies, often boosted by a heavy reliance in commodities such as Brazil, Australia, South Africa, etc. Manufacturing costs are incurred locally but the products manufactured and often exported are usually sold in US dollars.
Some US corporations like Levi Straus use currency hedges according to Roger Fleischmann, Levi’s Treasurer. If the market moves the wrong way, profits are preserved but the hedge shows up as a currency loss on the books.
Timing has been another problem this year. As subsidiary costs and sales are rolled up into the corporate books they are at the mercy of timing, come in at the right time and the exchange rates give a kind number on the costs, come in at the wrong time and they are valued as a loss. The third quarter hit many firms in that fashion.
Finally, firms that rely heavily on imports, either of components or raw materials can also suffer as the dollar weakens. What’s good for the exporter is bad for the importer, and on balance the US is a net importer.