Can a Strong Dollar Stifle Profits?

AMA1-29-15Can anything stop Apple? The computer giant posted record earnings for its most recent quarter, fueled by sales of its flagship device, the iPhone. Though it looks as if nothing can make a dent in Apple’s performance, one thing might: the performance of the dollar in world currency markets. And that has repercussions not just or Apple, but for US companies large and small.

According to a new report from Business Insider, this past quarter was the most profitable in Apple’s entire corporate history, with profits topping out at $18 billion. But the company still didn’t make as much money as it could have, and the much discussed global currency war is to blame.

In recent months international finance experts have termed the overall volatility of the world’s currency markets a “currency war,” as various national banks make currency policies to further their own agendas. Case in point, the Swiss franc’s recent surge – a move viewed by many as a white flag of surrender in a game of brinkmanship between the Swiss National Bank and the European Central Bank.

In January 2015 the Swiss National Bank removed its cap on the Swiss franc’s trading value against the euro – a cap that it had held firm for over three years. The decision to let the franc float against the euro came as the European Central Bank was making plans to begin a program of quantitative easing to boost the euro.

That plan, similar to the US Federal Reserve’s plan to help the economy by buying bonds, involved buying large amounts of securities to get more euros in circulation. The Swiss National bank’s hard line on capping the franc’s trading value was seen by many as a political bone of contention. The Swiss surrendered – and paid the price.

The franc soared in value, forcing Switzerland to buy up large amounts o foreign currency to keep up. Neighboring nations, whose debt was denominated in francs, scrambled to renegotiate and back the debt with more foreign currency. Even US currency trading giant Citigroup felt the hit.

The fate of the Swiss franc offers some insight about life on the front lines of the currency war, where the US dollar, also trading very strong, is also causing ripples around the globe – and making a dent in the profits of Apple and other companies doing business worldwide.

As the dollar gains strength against traditionally strong currencies such as the euro and the yen, global markets are bracing for another round of adjustments that could change the way goods are priced in various markets.

A strong dollar seems like a good thing. The dollar is after all the model of stability and security among the world’s monies. It’s the foreign currency of choice in places where local currencies are unstable or losing value. The dollar’s reputation in the world’s money markets was made clear in the early weeks of 2015, when the Russian ruble’s value declined by half in just six months. Fears of a currency collapse led Russians to convert their savings into foreign currencies, mainly the dollar, and to acquire as many dollars as they could. In debt-ridden Argentina, too, the dollar trades briskly on both black and official markets.

Like the Swiss franc, the dollar denominates debt for a number of countries around the world – and changes in the value of the dollar can mean changes in that debt as well, as indebted nations turn to other foreign currencies to back up the debt.

And as the dollar rises, the value of other currencies sinks. That means that foreign customers buying US goods (such as Apple’s iPhone) will have to pay more for those goods than previously. And that means less revenue for the company providing those goods.

The company has to make a choice: adjust pricing to accommodate the new currency valuations, or leave things as they are and absorb the hit to profits, which is what Apple has done in most areas of the world.

The currency wars pose a problem for just about any company doing business on a multinational level, not just giants like Apple. The world’s currency markets are constantly in flux regardless of interventions like the European Central Bank‘s quantitative easing plan. And as the dollar stays atop the list of the world’s most stable and desirable currencies, it will remain a player in the world’s currency wars – and the profit margins of its multinational corporations. (Top image:Flickr/imagesofmoney)

Sources:

End, Aurelia. “The Swiss National Bank is the First Casualty of the Modern Global Currency War.” Business Insider. businessinsider.com. 28 Jan 2015

Holodny, Elena. “Russians Scrambling To Get Their Hands on US Dollars.” Business Insider. businessinsider.com 16 Dec 2014

Udland, Myles. “Apple Just Reported a Record Quarter. But Analysts Wanted To Talk About Only the US Dollar – Here’s Why.” Business Insider. businessinsider.com 28 Jan 2015.

Read more from The American Monetary Association:

US Banks Hit By Swiss Franc Fallout

Who;s Winning the Currency Wars?

The American Monetary Association Team

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