How U.S. firms benefit when the dollar slumps

Is the drop in the value of the dollar necessarily a bad thing? There are numerous investors who believe that the opposite is true. Let’s see what happens when the dollar slumps:

Benefits for Multinational companies

Multinational companies easily enjoy a good time when the dollar’s value is on the dropping pace. If a specific U.S. based company does major business in Europe and the euro’s value is doing better in comparison to the dollar, they will most definitely enjoy profits as these euros will be converted against a weak dollar. It is simple to understand that better profits correlate to better results for shareholders.

The Multinational-Dollar relationship

U.S. multinational companies like McDonald’s and Procter &Gamble are the most famous globally operating U.S. based firms. They get a very high part of their yearly sales when the dollar droops from the overseas’ market. It may not be a long shot to say that the executives also cheer when the dollar falls.

Shareholders benefit from weakened dollar

There is hard evidence to support the fact that shareholders enjoy a good time when the dollar’s value falls. Think about McDonald’s and its U.S. Dollar Index to see how shocking the results are. McDonald’s benefits highly as soon as countries who are at a stronger position than a weak dollar keep consuming their burgers! Another simple way how shareholders benefit during times of a fallen dollar are by acquisitions. Companies who wish to buy a certain company based in the U.S. can do so at much cheaper amounts during such times.

U.S. exporters and the Dollar

Once the value of the dollar falls, large U.S. exporters get to enjoy other benefits. They can easily raise their prices on domestic currency that gets translated into the same price overseas. It is simple math that higher the price, higher will be the profit. If the dollar is weak for a long time, more manufacturing and productions will keep happening as the cost of foreign goods would have risen. This helps the U.S. economy in the long run.

Pitfalls of the weak dollar

When it comes to a shareholder’s approach, weakened dollar helps them but in mild quantities. That being said, if the dollar is weak for a long time, it causes pitfalls. Once the dollar is weak, the purchasing power of American consumers would reduce and they would most likely buy from simpler brands instead of expensive multinational brands. Trade gets affected by nations who still have strong currencies. This happens because there are companies who sign deals running for more than one year based on the assumption of a certain currency conversion rate. The trade with the U.S. would get affected in such a situation.

About the author: Eileen Cunningham