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Analysis: Dollar's surge spurs currency hedging by U.S. companies

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...
Analysis: Dollar's surge spurs currency hedging by U.S. companies © Reuters. U.S. dollar notes are seen in front of a stock graph in this November 7, 2016 picture illustration. Picture taken November 7. REUTERS/Dado Ruvic/Illustration/Files

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:KO) Co, Procter & Gamble (NYSE:PG) and Philip Morris International Inc (NYSE:PM). More broadly, analysts have lowered their overall forecast for S&P 500 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 late last year, as investors digested a hawkish turn at the Fed, which has already raised interest rates by 75 basis points since March. Markets are pricing in another 190 basis points of rate hikes in 2022.

Three-month volatility for the euro and the yen, against the dollar are at their highest since June 2020.

GRAPHIC: Euro-U.S. dollar volatility at 2-year high https://graphics.reuters.com/USA-STOCKS/zdvxogblapx/chart.png

As volatility picks up, "we are already seeing organizations re-adjusting their forecasts with 2% or more additional impacts to earnings than what they expected even a quarter ago," said Bob Stark, global head of market strategy at Kyriba.

Not all recent hedging activity has been aimed at protecting against the dollar's advance.

Dollar sellers, including importers who have enjoyed a boost in their purchasing power from the stronger currency, have rushed to lock in gains, Corpay's Schamotta said.

At the same time, the dollar's rise has been a boon to younger or smaller firms, including start-ups and companies looking to go public, as they tend to have more foreign costs than revenue.

Corporate clients at Silicon Valley Bank, which serves younger companies, have largely benefited from the stronger U.S. currency, said Ivan Asensio, head of FX risk advisory at the firm.

"Regardless of direction, however, the prospects of higher volatility has heightened hedging activity, awareness, and dialogue," Asensio said.

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21-05-2022 09:40:15 (UTC+7)

EUR/USD

1.0562

-0.0024 (-0.23%)

Summary

↑ Buy

Moving Avg:

Buy (12)

Sell (0)

Indicators:

Buy (7)

Sell (0)

EUR/USD

1.0562

-0.0024 (-0.23%)

Summary

↑ Buy

Moving Avg:

Buy (12)

Sell (0)

Indicators:

Buy (7)

Sell (0)

GBP/USD

1.2489

+0.0029 (+0.23%)

Summary

Neutral

Moving Avg:

Buy (8)

Sell (4)

Indicators:

Buy (2)

Sell (5)

USD/JPY

127.86

+0.07 (+0.05%)

Summary

Neutral

Moving Avg:

Buy (8)

Sell (4)

Indicators:

Buy (3)

Sell (3)

AUD/USD

0.7039

-0.0008 (-0.11%)

Summary

Sell

Moving Avg:

Buy (3)

Sell (9)

Indicators:

Buy (1)

Sell (3)

USD/CAD

1.2839

+0.0014 (+0.11%)

Summary

↑ Buy

Moving Avg:

Buy (11)

Sell (1)

Indicators:

Buy (5)

Sell (1)

EUR/JPY

135.05

-0.24 (-0.18%)

Summary

Neutral

Moving Avg:

Buy (6)

Sell (6)

Indicators:

Buy (3)

Sell (2)

EUR/CHF

1.0296

-0.0005 (-0.05%)

Summary

↑ Buy

Moving Avg:

Buy (12)

Sell (0)

Indicators:

Buy (7)

Sell (0)

Gold Futures

1,845.10

+3.90 (+0.21%)

Summary

↑ Buy

Moving Avg:

Buy (12)

Sell (0)

Indicators:

Buy (7)

Sell (0)

Silver Futures

21.765

-0.143 (-0.65%)

Summary

↑ Sell

Moving Avg:

Buy (4)

Sell (8)

Indicators:

Buy (2)

Sell (6)

Copper Futures

4.3042

+0.0212 (+0.49%)

Summary

↑ Buy

Moving Avg:

Buy (12)

Sell (0)

Indicators:

Buy (7)

Sell (2)

Crude Oil WTI Futures

110.35

+0.46 (+0.42%)

Summary

↑ Sell

Moving Avg:

Buy (0)

Sell (12)

Indicators:

Buy (1)

Sell (6)

Brent Oil Futures

112.91

+0.87 (+0.78%)

Summary

↑ Sell

Moving Avg:

Buy (0)

Sell (12)

Indicators:

Buy (0)

Sell (7)

Natural Gas Futures

8.058

-0.250 (-3.01%)

Summary

↑ Sell

Moving Avg:

Buy (0)

Sell (12)

Indicators:

Buy (0)

Sell (7)

US Coffee C Futures

216.48

-2.22 (-1.02%)

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↑ Buy

Moving Avg:

Buy (12)

Sell (0)

Indicators:

Buy (6)

Sell (0)

Euro Stoxx 50

3,657.03

+16.48 (+0.45%)

Summary

↑ Buy

Moving Avg:

Buy (7)

Sell (5)

Indicators:

Buy (9)

Sell (1)

S&P 500

3,901.36

+0.57 (+0.01%)

Summary

↑ Buy

Moving Avg:

Buy (12)

Sell (0)

Indicators:

Buy (8)

Sell (0)

DAX

13,981.91

+99.61 (+0.72%)

Summary

Buy

Moving Avg:

Buy (6)

Sell (6)

Indicators:

Buy (8)

Sell (0)

FTSE 100

7,389.98

+87.24 (+1.19%)

Summary

Neutral

Moving Avg:

Buy (3)

Sell (9)

Indicators:

Buy (7)

Sell (2)

Hang Seng

20,717.24

+596.56 (+2.96%)

Summary

↑ Sell

Moving Avg:

Buy (4)

Sell (8)

Indicators:

Buy (1)

Sell (7)

US Small Cap 2000

1,768.35

-7.87 (-0.44%)

Summary

↑ Buy

Moving Avg:

Buy (7)

Sell (5)

Indicators:

Buy (7)

Sell (1)

IBEX 35

8,484.50

+78.50 (+0.93%)

Summary

Neutral

Moving Avg:

Buy (3)

Sell (9)

Indicators:

Buy (5)

Sell (2)

BASF SE NA O.N.

48.850

-0.010 (-0.02%)

Summary

Buy

Moving Avg:

Buy (6)

Sell (6)

Indicators:

Buy (6)

Sell (1)

Bayer AG NA

63.74

+0.34 (+0.54%)

Summary

Buy

Moving Avg:

Buy (6)

Sell (6)

Indicators:

Buy (6)

Sell (2)

Allianz SE VNA O.N.

195.58

+0.78 (+0.40%)

Summary

Buy

Moving Avg:

Buy (6)

Sell (6)

Indicators:

Buy (8)

Sell (0)

Adidas AG

172.80

+0.92 (+0.54%)

Summary

Buy

Moving Avg:

Buy (6)

Sell (6)

Indicators:

Buy (7)

Sell (1)

Deutsche Lufthansa AG

6.852

+0.049 (+0.72%)

Summary

↑ Sell

Moving Avg:

Buy (0)

Sell (12)

Indicators:

Buy (2)

Sell (5)

Siemens AG Class N

115.08

+2.62 (+2.33%)

Summary

Neutral

Moving Avg:

Buy (3)

Sell (9)

Indicators:

Buy (4)

Sell (4)

Deutsche Bank AG

9.362

-0.130 (-1.37%)

Summary

Buy

Moving Avg:

Buy (6)

Sell (6)

Indicators:

Buy (8)

Sell (1)

 EUR/USD1.0562↑ Buy
 GBP/USD1.2489Neutral
 USD/JPY127.86Neutral
 AUD/USD0.7039Sell
 USD/CAD1.2839↑ Buy
 EUR/JPY135.05Neutral
 EUR/CHF1.0296↑ Buy
 Gold1,845.10↑ Buy
 Silver21.765↑ Sell
 Copper4.3042↑ Buy
 Crude Oil WTI110.35↑ Sell
 Brent Oil112.91↑ Sell
 Natural Gas8.058↑ Sell
 US Coffee C216.48↑ Buy
 Euro Stoxx 503,657.03↑ Buy
 S&P 5003,901.36↑ Buy
 DAX13,981.91Buy
 FTSE 1007,389.98Neutral
 Hang Seng20,717.24↑ Sell
 Small Cap 20001,768.35↑ Buy
 IBEX 358,484.50Neutral
 BASF48.850Buy
 Bayer63.74Buy
 Allianz195.58Buy
 Adidas172.80Buy
 Lufthansa6.852↑ Sell
 Siemens AG115.08Neutral
 Deutsche Bank AG9.362Buy
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