Strong dollar takes toll on U.S. businesses

U.S. businesses with significant overseas sales are beginning to feel the effects of the strengthening dollar.

Last week, Coca-Cola said it expects per-share earnings in the current quarter to be 9% lower because of the currency impact.

In a call with analysts last week, Nick Gangestad, chief financial officer of 3M, the industrial and consumer products conglomerate, said he expects the rising value of the greenback to reduce sales in dollars by 2% to 3% next year.

Neogen, which makes food testing kits, said revenue for one of its product lines declined 2% in the quarter ended Nov. 30, partly because of dollar appreciation.

The strong dollar "has the potential of damaging overseas demand," says Chad Moutray, chief economist of the National Association of Manufacturers.

A strong dollar hurts companies' revenue by making U.S. goods more expensive for foreign buyers and cutting the value of overseas sales when they're converted back to dollars.

Since July, the dollar has risen against the euro by about 12% on a healthy U.S. economy, weak overseas growth and Federal Reserve plans to increase U.S. interest rates. The dollar is at a five-year high against a basket of major currencies, according to the St. Louis Federal Reserve Bank.

Last week, the Empire State manufacturing survey showed that factory activity in New York shrank for the first time in nearly two years this month — a drop that Moutray at least partly attributes to the currency movement.

While the climbing dollar took a toll on third-quarter earnings, a bigger impact is expected in the current quarter. McDonald's said the dollar is likely to cut fourth-quarter profits by as much as 6 cents a share.

Exports make up about 46% of the earnings of Standard & Poor's 500 companies, says S&P senior analyst Howard Silverblatt.

Yet many small manufacturers feel even bigger impacts from currency fluctuations because they have fewer cash reserves and less access to capital than large companies. Quality Float Works, which makes sensors for oil and water tanks, has seen its exports fall 3% this year, says Jason Speer, president of the 25-employee firm based in Schaumburg, Ill.

"We've found it more and more difficult to compete with (lower-cost) Asian manufactured goods that are similar," Speer says. Exports make up about 30% of the company's revenue.

In response, Quality Float Works has cut prices for some customers by up to 20%, Speer says. That has eaten into profits, forcing the company to put off plans to hire up to two employees this quarter.

Moody's Analytics chief economist Mark Zandi expects the strong dollar to hold down U.S. economic growth next year by about three-tenths of a percentage point to 3.3%, partly offsetting the positive effects of low oil prices.