Recently the EUR/USD exchange rate surged to a price of $1.3575, mostly in the face of stabilizing conditions in Europe, and increasing uncertainty on fiscal policy in the US capped off by initial estimates of US GDP contracting by 0.1 percent in the 4th quarter. Actually, the exchange rate has been in an upswing since early July, just after the government reported that corporate profits decayed for the first time since 2008 when compared to the growth of GDP. A weak dollar can actually help some of our largest US multinationals with a significant presence in the old countries.
The reason a weak dollar helps US multinationals lies in how revenues, expenses, assets, and liabilities translate into greenbacks on consolidated financial statements. When the foreign currency is stronger than the domestic currency, translating financial statements from foreign currency to domestic results in higher revenue, net income, assets, liabilities, and total equity reported on the parent company’s consolidated financial statements in most cases.
For example, in Q1 of 2012 the average EUR/USD exchange rate was $1.3106. This means that one could exchange €1 for $1.31, give or take a hundredth of a penny. A company translates income statement items at average rates over the accounting period while translating balance sheet items at either the exchange rate as of the reporting date or historical cost, depending on the specific translation method used.
Ford Motor Company (NYSE:F) had a ford tough Q1 in 2012, as the company earnings in Europe conked out at €5.5 billion, a decline of -13.7 percent. After factoring in a stronger dollar compared to a year earlier, the loss expanded to -17.3 percent.
Because the foreign currency is the strongest, revenues and net income translate at a greater number of greenbacks to euros, making company financials shine a little brighter. For Ford, Euro zone sales accounted for roughly 18 percent of company revenues. That’s just a wheel on the bus compared to companies like McDonald’s Corporation (NYSE:MCD), Philip Morris International Inc. (PM), and Apple Inc. (NASDAQ:AAPL), who all have more exposure to the old continent than Ford.