The U.S. Dollar Index (DXY), which measures the strength of the dollar against a host of major currencies, is reaching 20-year highs and that's bad news for businesses like Nike Inc NKE, which releases earnings on Thursday.
First, a little insight. The Federal Reserve initially created the DXY in 1973 to offer an external bilateral trade-weighted average value of the dollar against other world currencies.
When the U.S. dollar gains strength in relation to other currencies, the U.S. Dollar Index rises. The index is based on the following six currencies:
Euro (EUR) 57.6% weight
Japanese yen (JPY) 13.6% weight
Pound sterling (GBP) 11.9% weight
Canadian dollar (CAD) 9.1% weight
Swedish króna (SEK) 4.2% weight
Swiss franc (CHF) 3.6% weight
Here is the performance of the same six currencies, on a one-year basis.
Japanese yen: -23.4%
Pound sterling: -21.8%
Canadian dollar: -8.2%
Swedish króna: -24%
Swiss franc: -7.15%
Given that the Pound has fallen to all-time lows and the Euro has dropped to its lowest point in 20 years, the Dollar index's 22% upside move over the past year and 4% over the past week is pretty substantial.
Read also: British Pound Drops To All-Time Lows: 'Existential Crisis Is Looming'
While a strong U.S. dollar can benefit American consumers who travel abroad or purchase imported goods, it frequently has a negative impact on company profits.
American goods will cost more in Europe and Japan as the dollar strengthens. Nike and Microsoft issued warnings earlier this year, pointing out that the strengthening of the dollar made many firms' last quarter sales and profits appear lower than they actually were.
Companies that generate revenue in foreign currencies must convert that revenue back into dollars in order to report it. The value of those overseas revenues declines as the value of the dollar rises.
Since tech companies receive the majority of their sales from outside the United States, they may be particularly heavily hit. The rising dollar might hurt businesses like Apple, Meta Platforms, Alphabet, and Netflix.
Here’s an example: Earlier this year, Netflix NFLX raised the cost of its basic service in the U.K. by 10%.
However, Morningstar predicts that due to the weaker pound, Netflix's reported revenue per U.K. customer will fall by about 4% in the third quarter.
Netflix's major expense, content costs, are largely paid in USD, therefore the weaker pound will have a negative impact on the business's bottom line.
Nike's North American revenue for the fiscal year 2022 was around $18.35 billion USD. The company's revenues that year in the EMEA region (Europe, the Middle East, and Africa) totaled close to $12.5 billion USD.
In contrast, since a dollar now has a higher value in euros, European businesses that convert dollars into euros will make more money.
There are only two methods for the dollar, or the currency of any other nation, to appreciate against other currencies.
When there is a rise in the currency's demand on a worldwide scale, its value increases. Additionally, money appreciates in value when the country's central bank restricts the supply of currency, which is exactly what the Fed is doing right now.
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