Dollar’s surge spurs currency hedging by U.S. companies By Reuters

By Saqib Iqbal Ahmed

NEW YORK (Reuters) – U.S. companies are ramping up efforts to protect their profits from a relentless rally in the dollar, as the greenback surges to multi-decade highs.

The dollar has climbed about 15% against a basket of currencies over the last year, helped by a hawkish Federal Reserve and heightened geopolitical tensions that have boosted the greenback’s safe-haven appeal.

GRAPHIC: Soaring dollar https://fingfx.thomsonreuters.com/gfx/mkt/lbvgnyanxpq/Pasted%20image%201652202820561.png

That surge has reduced the profits of U.S. multinational companies that convert foreign currency into dollars, adding to corporate worries over soaring inflation and a murky economic outlook and pushing some to more actively seek ways to hedge their earnings.

Companies citing currency headwinds in their latest earnings reports include Coca-Cola (NYSE:) Co, Procter & Gamble (NYSE:) and Philip Morris International Inc (NYSE:). More broadly, analysts have lowered their overall forecast for second-quarter profit growth to 5.6% from 6.8% at the start of April.

“Corporates have been spurred into action by the dollar’s untrammeled rise – and by the breaking of psychological barriers in most major exchange rates,” said Karl Schamotta, chief market strategist at business payments company Corpay.

The dollar stands at a two-decade high against the Japanese yen and a more than five-year high against the euro, after rising 13% and 8% respectively against the currencies this year.

To prevent big exchange rate moves from creating big swings in earnings, businesses are using various types of hedging strategies, including those that employ forwards and options.

While little industry-wide data are available to gauge how U.S. companies’ hedging decisions are being driven by the dollar’s big advances, several firms that advise companies on managing FX risk note a rise in hedging activity.

“Some of the corporates we work with that have a set hedging policy have a percentage band as to how much of their exposure they are supposed to have hedged. We are seeing those clients move to the high side of their band,” said John Doyle, vice president of dealing and trading at Monex USA.

Hedging activity by Monex’s clients rose 22% uptick in March 2022 versus 2021, and was up 24% for the first quarter compared with last year, Doyle said.

The urgency to guard against adverse exchange rate moves comes after years of muted FX volatility, during which currency fluctuations had limited impact on company earnings.

The negative impact of currency fluctuations on North American companies’ third-quarter 2021 results fell to the lowest level since the first quarter of 2018, data from treasury and financial management firm Kyriba showed in early February.

But foreign exchange volatility picked up…