Why a Weaker US Dollar May Help Corporate Earnings

While companies with sole operations in the US may see a negative effect on earnings, multinational companies can benefit from the conversion of a stronger foreign currency to a weaker US Dollar. This effect has the potential to bolster corporate earnings for companies with larger revenue generating capabilities in countries outside the US. Global companies like Alphabet, which only generated 46% of revenue in the US in FY19, have a dependency on foreign nations to generate sales and therefore are exposed to fluctuations in foreign exchange rates. Because 99.59% of its revenue comes from advertising across global platforms such as Google and Youtube, when the other 54% of ad dollars are generated in foreign currencies, they must be converted back into US Dollars and are recorded on the company’s income statement then. The strong foreign currency will be converted into more US dollars, helping to drive revenue growth. A weaker US currency can also be favorable for US companies that export goods to foreign nations. US manufacturing companies, for example, leverage a weaker US Dollar to drive demand for products as their goods become cheaper to the rest of the world. A weaker US Dollar is a headwind for companies who rely on foreign countries in their supply chain, and imports of various goods. This is because a weak dollar can buy less of a stronger currencies’ goods.

When the dollar is strong, companies that are solely exposed to revenue lines in the US benefit the most. This is because the currency being used to purchase their goods and services is strong. Companies that export their goods with a stronger dollar may see less demand for products as a strong currency means foreign nations will have trouble purchasing, and the weaker foreign currency will be worth less US Dollars upon conversion.