The strengthening of the dollar this past year caught the financial markets by surprise. No one anticipated such a steep and sustained drop in the value of global currencies. The dollar has gained approximately 25% against the Euro, 26% against the Canadian dollar, 27% against the Australian dollar and, to a lesser degree, 14% against the British Pound, all measured against their recent high points. The specific turning points varied for individual currencies, as shown below; it began in July 2011 for the Canadian dollar and May 2014 for the Euro.

Currency Recent Low Point Recent High Point
Euro May 8, 2014


March 25, 2015


Canadian Dollar July 27, 2011


March 15, 2015


British Pound July 6, 2014


March 15, 2015


Australian Dollar April 13, 2013


March 12, 2015



The decline of the Euro was buttressed partially by the European Central Bank’s decision to emulate the U.S. and engage in quantitative easing, after dithering for many years. On March 25, 2015, the Euro dropped to $1.0493 and there is now speculation that it might breach parity, which has not occurred since December 5, 2002.[1]

Although the strong dollar will hurt U.S. exports and increase imports, the final impact is more nuanced and will depend on the industry and the composition of a firm’s production, sales, and borrowings. The only certain impact is on the overseas cash balances of U.S. companies; its value has declined significantly. Below is a brief overview on the dollar’s impact on two broad sectors of industry, Main Street and Wall Street, followed by a discussion on the overseas cash balances.

Main Street

Although U.S firms announced positive profits for 2014, their fourth-quarter earnings were below forecast. Most firms are projecting lower earnings for 2015 as a result of the strong dollar. Proctor and Gamble is predicting a decline of 15 percent while IBM expects a 7% hit on earnings.   The impact on U.S. firms with large overseas operations is not consistent across firms. If a company has production facilities overseas or imports raw materials, its expenses will assuredly be lower, especially if it sells in the U.S. One such company is Alcoa which has most of its bauxite mining facilities overseas but half of its sales in the U.S.

On the other hand, this may not be the case if the production facilities or imports are from China. This is because the Chinese renminbi has gradually appreciated by 14% since 2011. Indeed, on March 16, 2015 when other currencies were falling against the dollar, the renminbi appreciated and is currently trading at $0.1630/CNY. If it continues its gradual appreciation, U.S. companies with production facilities in China and sales outside of China may suffer a double whammy.

Compounding the exchange rate factor is also the decline in oil prices which is expected to offset exchange related losses in the U.S.  A good example is the airlines industry whose exchange rate losses from overseas sales has been tempered with lower oil prices.

Wall Street

For foreign investments currently in the U.S., the news is good because they will be able to repatriate more earnings back home. Yet it might be premature for foreign investors to repatriate because the U.S. economy is showing robust growth and the dollar is unlikely to depreciate in the near future. In addition, if the Fed increases interest rates as expected, the dollar may even get stronger and enhance returns. The dollar is likely to decline only when Europe recovers and China and India stabilize, the three major drivers of global growth.  Risk-averse investors could invest in short-term or very liquid instruments for quick repatriation if there are signs of pressure on the dollar.

For new investors, investing in the U.S. is going to more expensive compared to a year ago. However, they face the same choices as above: invest in declining markets or invest in a strengthening U.S. market. All foreign investors will have to keep an eye for signs of a possible long-term depreciation of the dollar.

U.S firm’s overseas cash balances
One impact of the rising dollar that has not been reported widely is the decline in the value of corporate cash holdings of U.S. companies held overseas. A recent estimate by Bloomberg puts the total cash holdings parked overseas at $2.1 trillion.[2] Some cash is genuinely needed for overseas expansion but many CEOS have confirmed that the excess cash left overseas was for tax reasons. In hindsight, this may not have been a wise move since the strong dollar has reduced ts value.

We will highlight the loss using an example of €10 billion excess cash parked in Europe.  Assume the exchange rate was $1.35/€ a year ago. If we assume the company paid taxes of 15% on overseas income and are subject to approximately 20% tax upon return to the U.S., the change in value is as follows:[3]

Prior to dollar decline
Tax bill:= €10 billion x 1.35 = $13.5 billion x 0.20 =$2.70 billion
Cash available to shareholders = $10.80 billion

After dollar decline at 20% tax
Tax bill: €10 billion x 1.05 = $10.5 billion x 0.20 =$2.10 billion
Cash available to shareholders = $8.40 billion (loss of 22.22%)

Companies were hoping for a tax break similar to the one offered in 2004 when corporations were allowed to repatriate overseas cash back to the U.S. for a one-time 5.25% tax. Unfortunately, even if that was offered today, the cash available to shareholders will still be lower by 7.89% as shown below.

After dollar decline at 5.25% tax
Tax bill: €10 billion x 1.35 = $10.5 billion x 0.0525 =$551.25 million
Cash available to shareholders  = $9.948 billion (loss of 7.89%)

The Obama administration is unlikely to offer any such tax break. Although most firms hedge overseas operating cash flows, it is unlikely they would have hedged cash holdings. To get a sense of the loss, take the example of two companies holding the largest cash overseas, GE at $119 billion and Microsoft at $93b at year-end 2014. The reduction in value is $23.8 billion and $18.6 billion, respectively, if we assume an average 20% rise in the value of the dollar. That is a big chunk of a loss to shareholders!

[1] It first breached the parity on July 16, 2002 and then fell back and breached again in November 6, 2002. However, since December 5, 2002, it has not fallen below parity. Source:

[2] Bloomberg analyzed the balance sheet of 299 firms for this estimate.

[3] We ignore withholding taxes imposed by some countries on dividend repatriations.