A stronger U.S. dollar may sound like a good thing, but it's providing a serious headwind to earnings. And the situation could get worse.
"We're seeing a lot of high-level names already report the effect of a strong dollar," said Kathy Lien, BK Asset Management managing director. "We've got Coca-Cola saying that, and Johnson & Johnson. IBM said revenues were down 3 percent, but would only be down 1 percent if it weren't for currency effects."
Indeed, on Coca-Cola's Tuesday's earnings call, CFO Gary Fayard noted: "On a comparable basis, the impact of currency was a 3 percent headwind on this quarter's operating income results." And Fayard foresees that headwind growing stronger. "We expect currencies to be a 4 percent headwind on our operating income for the third quarter and full year," he said.
The Dollar Index, which tracks the value of the U.S. dollar relative to a basket of other currencies, has appreciated over 4 percent this year. This poses a problem to multinational companies because it means that the foreign currency they receive is worth less when converted back into dollars. For instance, when a dollar could buy 87 yen at the beginning of the year, someone paying 100 yen for a can of Coke is effectively paying $1.15. But with the dollar/yen trading at 100, that same person is effectively paying only $1.
