A Strong Dollar Has Shaken Up the Competitive Landscape in Many Industries
After appreciating sharply in 2014, the dollar has continued to strengthen against a broad spectrum of currencies. Since the beginning of the year, central banks outside the U.S. have moved decisively to combat low inflation and stimulate economic growth by driving down their currencies through the expansion of quantitative easing programs and interest-rate cuts.
While currency fluctuations can affect multinationals in a multitude of ways, major exporters outside the U.S. have seen a revenue windfall and a profit margin boost from the depreciation of their currencies. But not all companies benefit equally, underscoring the need for bottom-up research.
Take for instance Japanese automakers. A strong yen was a powerful headwind for these companies between 2008–2012. During this time, some carmakers chose to reduce their exposure to the yen by localizing production in the U.S., but others, such as Toyota, opted to halt North American production growth. The effect was that the company now has a much higher U.S. import ratio than its domestic competitors — and so it benefits more from a weak currency. Given that Toyota’s labor costs are significantly lower in Japan than in the U.S., the company is now seeing higher profitability than other Asian companies making cars locally in the U.S. market.
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