While the U.S. dollar has managed to gain a lot of ground against other major currencies in the last couple of months, the counter effect on the economy and corporate profits can be quite serious; at least that’s what some industry representatives are saying, with talk of a profit recession being a real possibility if the trend continues according to some corporate voices.
Economists from the Bank of America and other market analysts have provided sufficient evidence to calm such rumors arguing that while some corporations might see profits being affected the overall effect of a strong dollar won’t be just in terms of bigger profits but also a stronger economy and increased growth in just about all fields.
As most big corporations, also known as multinationals do business in currencies which lost ground to the dollar, it is a logical repercussion that when profits get tolled up in the U.S. currency the overall profits might be underwhelming. This is true for a number of big software and hardware companies like Apple and Microsoft, who makes a significant amount of their profits in Europe and China. The same applies to the Wallmart owned Asda, who make their biggest profit in pounds sterling. While these companies may experience what is generally called an earnings recession, the overall effect of the strong dollar will lead to good results at a macroeconomic level.
According to recent market research it would appear that the nearly 25 percent increase of the U.S. currency in the last year has also meant a 10 percent decrease in earnings of the market per share.
While this may be true, a look at the entire U.S. economy will make even the biggest pessimist see potential. A strong dollar also means cheap imports, which will help both the business environment as well as consumers. The J Curve theory basically says that cheap imports will first help increase profits for importers before leading to the decrease of consumer prices.
This will allow the business field, including large corporations, to make strong profits until direct competition will lead to consumer advantages. While some large names will see falling profits, a lot of other corporations will have the potential to grow.
When viewed from a macroeconomic standpoint, a strong dollar also reflects market confidence and a strong economy, which in turn will lead to bigger investments, a growing job numbers and increased profits for all players, even for the corporations which are currently taking the biggest hits.