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

May 11, 2022 02:10AM ET

By: AnalysisWatch

US companies are stepping up efforts to protect their profits from a steadily rising dollar, which has reached its highest level in decades.

In the past year, the dollar has risen about 15 per cent against a basket of currencies, driven by a tightening of Federal Reserve policy and rising geopolitical tensions that have increased its appeal as a safe haven.

This rise has undermined the profits of US multinationals that convert foreign currencies into dollars, causing companies to worry about rising inflation and the bleak economic outlook and prompting some of them to look more actively for ways to hedge their profits.

The dollar reached a two-decade high against the Japanese yen and a five-year high against the euro, rising 13% and 8% against these currencies respectively this year.

In order to avoid large fluctuations in exchange rates, which can lead to large fluctuations in profits, companies use various types of hedging strategies, including the use of futures and options.

While there is little data available in the industry on the extent to which US companies' hedging decisions have been affected by the sharp rise in the dollar, several firms that advise companies on currency risk management have noted an increase in hedging activity.

According to Doyle, hedging activity among Monex clients increased by 22 per cent in March 2022 compared to 2021 and by 24 per cent in the first quarter compared to a year earlier.

The urgent need to hedge against adverse exchange rate movements arose after several years of moderate exchange rate volatility, when currency fluctuations had a limited impact on corporate profits.

Dollar sellers, including importers whose purchasing power has increased due to the strengthening currency, have rushed to safeguard their profits

At the same time, the dollar's rise in value has been a boon for younger or smaller companies, including start-ups and those seeking to go public, as they generally have more overseas expenses than revenues.