As companies fortify their financial defenses against a surging US dollar propelled by Trump’s tariff policies, are they hedging their bets on quicksand?
At a Glance
- Corporate treasurers are upping their hedging efforts due to a US dollar strengthened by tariff plans.
- The dollar index is nearing a two-year high, driven by expected economic growth and trade protectionism.
- Speculators’ net long positions on the dollar have hit $35 billion, a near nine-year high.
- Multinationals face costly foreign earnings conversion and shrinking export competitiveness due to the strong dollar.
Strengthening Dollar and Corporate Concerns
The recent surge in the US dollar has compelled corporate treasurers to ramp up their efforts to hedge foreign exchange (FX) risks. These efforts have become increasingly important given the dollar’s upward trajectory, fueled by expectations of economic growth and shifts in trade policy under the Trump administration. As multinational corporations including Apple and Microsoft issue warnings about how a strong dollar could dampen financial outcomes, hedging strategies are becoming a critical line of defense.
The rise of the US dollar index, which is edging towards a two-year high after climbing about 7% since September, underscores the mounting pressure on companies engaged in global operations. Speculators have increased bullish bets on the dollar, with net long positions surging to $35 billion—figures not seen in nearly nine years. These developments have driven an uptick in corporate hedging activities, which many enterprises argue is crucial amid the ongoing currency volatility and trade tensions.
The Impact on Multinationals and Small Firms
Smaller firms, particularly those under the $100 million market cap, find themselves especially vulnerable due to limited resources and less sophisticated hedging infrastructure. They are acutely aware of the financial threats posed by a robust dollar, influenced by the nation’s political shifts. Meanwhile, large corporations are actively updating their hedging programs to guard against such risks. This heightened vigilance comes as companies like Apple and Johnson & Johnson report negative financial impacts from currency market fluctuations.
“We expect foreign exchange to be a 3-point headwind when compared to the December quarter growth rate. We currently expect FX to have a negative impact on growth of 2 points in the March quarter” – Luca Maestri, CFO at Apple
Even among tech giants like Apple, Microsoft, and Adobe, the recent dollar strength has led to lower foreign earnings and impediments in export competitiveness. While some businesses have successfully leveraged forward contracts, currency options, and swaps, smaller companies with constrained hedging capabilities face even greater hurdles in managing these financial risks.
Forward-Thinking Strategies: A Corporate Imperative
Treasurers at both ends of the corporate spectrum agree that a strong hedging strategy, incorporating tools like forward contracts, swaps, and currency options, is essential in today’s high-stakes economic environment. Analysts cautioned that exacerbating trade tensions could undermine these efforts, complicating companies’ ability to effectively forecast and manage risks. This scenario necessitates a realignment of supply chains for some, alongside grappling with declining international revenues.
“Leading up to the election, our research showed that North American firms below $100 million-market cap were acutely aware of the likelihood, as well as the risks, of a strong dollar after the nation went to the polls” – Eric Huttman
As businesses navigate these turbulent waters, proactive risk management and reassessing hedging strategies remain indispensable. This prudent approach may, for now, offer the most effective shield against the unpredictable waves of currency fluctuations and economic policy changes looming on the global horizon.
Sources:
https://nypost.com/2025/02/06/business/surging-dollar-spurs-jump-in-corporate-fx-hedging/
