It is easy to get excited about a strong dollar. When the dollar is strong, imports are cheaper. This means input costs are more manageable, thereby freeing up a lot of space in terms of profits. This is great if your company is completely domestic. If you are dealing with a company that does most of its business within the borders of the United States, you have nothing to worry about, as far as the strong dollar is concerned. The problem is when a lot of your business is done overseas, the strong dollar can’t help but hurt you.
Take the case of Microsoft’s recent 2nd quarter earnings report. Its Japanese and Chinese sales volumes went down because of the strong U.S. dollar. Put simply, since Microsoft products are priced in dollars, the ongoing strength of the greenback has acted as a brake to purchasing plans for Microsoft products. Not surprisingly, the slowing global economy is negatively impacting Microsoft’s bottom line.
This is a serious issue for large companies like Microsoft (NASDAQ:MSFT) that are closely tied to overseas manufacturers. A lot of the biggest manufacturers of computer products that run Microsoft software are based in China or Japan. Not surprisingly, the high price of commercial licensing fees, due to the strong dollar, serves to discourage Chinese and Japanese demand for Microsoft products. Keep your eyes peeled for companies with strong global manufacturing presence because these companies might be vulnerable to the negative impact of a strong green buck.
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