By Saqib Iqbal Ahmed and Laura Matthews
NEW YORK (Reuters) – Corporate treasurers are ramping up efforts to guard company earnings against more dollar strength, a move that some analysts said points to increased conviction that President Donald Trump’s tariff plans will help keep the U.S. currency higher for longer.
The U.S. dollar index is about 7% above its September lows, hovering close to a two-year high reached in January as investors bought the buck on expectations it would benefit from sturdy U.S. economic growth and Trump’s protectionist trade policies.
Speculators have loaded up on bullish bets on the currency, driving up net long dollar position to as high as $35 billion, the largest in nearly nine years.
Corporate treasurers, who often use forward contracts, currency options and swaps to reduce potential losses from currency fluctuations, typically move at a more staid pace. But they are increasingly coming around to the view that the dollar can power higher or linger at these lofty levels for a while.
“The corporate community is slower to act and more deliberate,” Paula Comings, head of foreign-exchange sales at U.S. Bank.
“(But) we’ve seen those who have significant exposure from revenues overseas that they need to repatriate, adding to these forecasted cash flow hedging programs,” she said.
“What we’re hearing from clients is that they are planning for a perseverance of the dollar,” Comings said.
Multinational companies such as Apple and Microsoft already have warned the strong dollar stands to pressure financial results in the coming months.
While there is little visibility into the aggregate level of corporate hedging activity, interviews with market participants show the impetus to protect against further dollar strength kicked into high gear ahead of the November U.S. election and in anticipation of Trump’s potential victory.
“Leading up to the election, our research showed that North American firms below $100 million-market cap were acutely aware of the likelihood, as well as the risks, of a strong dollar after the nation went to the polls,” said Eric Huttman, CEO of MillTechFX.
“Half of these smaller firms reported that they were concerned about the impact of policy changes on currency values,” he said.
Foreign exchange markets’ vulnerability to volatility came to the fore this week as threats of U.S. tariffs against Mexico, Canada and China prompted a rally on the dollar and sparked a surge in volatility.
While the stronger dollar is a reflection of the relative strength of the U.S. economy, it can pose a problem for some companies. A strong U.S. currency makes it more expensive for multinational companies to convert foreign profits into dollars, while also hurting the competitiveness of exporters’ products.
“We have seen a strong uptick in hedging activity across a wide range of industries, as corporates have sought to protect themselves against the higher volatility environment and the increased uncertainty since Trump’s election win and the dollar’s strong rally,” Kyle Chapman, FX market analyst at Ballinger Group in London, said.
“FX is being driven by headlines that are ubiquitous even outside market circles, and this is drawing treasurers’ attention to market fluctuations,” he said.
TARIFF TROUBLE
Underpinning this uptick in hedging activity is growing conviction that dollar strength is here to stay for a while as Trump’s tariffs come into play.
“There is a general feeling that we have entered a stronger dollar environment since Trump’s re-election … the scale and the pace of the rally since September has woken people up to the effect of FX movements on the bottom line,” Chapman said.
Several companies have in recent weeks reported and projected sizeable negative impact due to unfavorable currency market moves.
Apple in late January warned that it expects the stronger dollar to shave 2.5 percentage points from its current-quarter revenue, on a year over year basis.
Johnson & Johnson also said unfavorable foreign currency moves shaved off $1.7 billion, or 2%, of its 2024 sales, while Microsoft warned its third quarter revenue growth would be hit by 2 percentage points due to the stronger dollar.
Smaller and less FX-sophisticated companies, who are often constrained by leaner hedging budgets, limited amount of capital they can tie up in hedges and general lack of access to more advanced hedging programs with the best pricing, face a bigger challenge from a buoyant buck.
“The stronger dollar requires treasury teams at smaller corporates to more carefully manage FX risks and implement sound hedging strategies to help adjust to this new normal,” MillTechFX’s Huttman said.
Amol Dhargalkar, managing partner at risk management firm Chatham Financial, said that in 2024 large companies reached out more than expected to review and update their hedging program because of concerns about dollar strength, and it was not surprising to now see smaller companies make similar moves.
While the tariff-related headlines might have prompted a pickup in hedging activity, a larger escalation in trade tensions might undermine those efforts since an all-out trade war may jeopardize companies’ ability to forecast business activity and put on effective hedges, analysts warned.
“For many businesses, their underlying cash flows are at risk here … some may have to realign their supply chains while some may have to deal with lower customer revenues in international locations,” said Karl Schamotta, chief market strategist with payments company Corpay in Toronto.
“It’s a lot of cross currents and it isn’t just a linear increase in hedging volume,” Schamotta said.
(Reporting by Saqib Iqbal Ahmed and Laura Matthews; Editing by Lewis Krauskopf and Marguerita Choy)
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