As dollar rebounds, corporates look to hedge

NEW YORK (Reuters) - The dollar's month-long rally against its major rivals, prompted by signs of widespread economic weakness outside the United States, carries a sting in the tail for U.S. companies with exposure to overseas markets.

Having been used to the long-term dollar downtrend of the past seven years, corporations were caught unaware by the greenback's out-sized move this month and most were not hedged against it, market participants said.

The dollar's decline had boosted revenue for U.S.-based multinationals, making their products less expensive in foreign markets, and increasing the value of overseas earnings when converted into the U.S. currency.

That changed in August as the dollar soared 5.4 percent against a basket of major currencies, the largest monthly gain in more than 11 years. For the year, the dollar has recovered 2.4 percent so far, after losses of 8.4 percent in 2007.

Investors have bought back the greenback, convinced that the dollar is a safer bet compared with other currencies whose countries have lagged the United States in terms of economic readjustment amid the global credit crunch of the past year.

"Most of these U.S. companies are not prepared for this dollar rally and are not hedged," said Wolfgang Koester, chief executive of FIREapps, a provider of software to manage currency exposure based in Scottsdale, Arizona.

"If they were hedged, they wouldn't have those gains. Bottomline, corporations should have no material currency volatility."

Overall, a weak dollar has helped technology giants with overseas presence such as Google Inc. (GOOG.O), eBay Inc. (EBAY.O), Hewlett Packard (HPQ.N), and Amazon.com (AMZN.O).

Google and Amazon earned half of their revenue for the past 12 months from overseas while eBay earned roughly 53 percent, analysts said.

Hewlett-Packard, the world's biggest computer maker, reported better-than-expected quarterly profit and revenue last month thanks to strong international sales in its notebook computer and printer businesses. The company's fiscal third-quarter revenue rose to $28 billion, with revenue from outside the United States accounting for 68 percent.

HEADWINDS INTO 2009

If the dollar continues to strengthen "the positive impact of the currency on U.S. internet players (seen over the last few quarters) will end in the fourth quarter and will actually become a revenue headwind through 2009 negatively by minus 8 to minus 13 percent," said Sanford C. Bernstein analyst Jeffrey Lindsay in New York.

And the effect of currency rates is not limited to revenue growth, he added, but may also influence operating margins. A strong dollar reduces operating margins more than a weak dollar helps them, he said.

Other companies such as industrial conglomerate Danaher Corp. (DHR.N) also fretted about a surging dollar. On Wednesday, the company, which makes craftsman tools and water treatment systems said the dollar's rally has created headwinds for the company and is watching the growing economic slowdown in Europe.

On the other hand, companies such as Covidien Ltd. (COV.N),, which makes health care products, have hedged some of their transactions but not their earnings. The firm's non-U.S. sales grew 18 percent aided by favorable currency translations, Covidien's chief financial officer Charles Dockendorff said during the company's second-quarter conference call.

"We do hedge on transactions...but we don't hedge the translation or the earnings of these businesses...There is some favorability to the operating income as a result of those translations from FX," Dockendorff said. The transcript of Covidien's call was made available on SeekingAlpha.com.

But more companies are looking to increase their dollar hedges, analysts said. Ideally, about 80 percent of companies' international exposure should be hedged, although experts say no one really follows this when things are going in a corporation's favor.

"The last two or three years, it's been profitable to be underhedged with the falling dollar and overall U.S. corporates are underhedged all the time," said Mike Moran, senior currency strategist, at Standard Chartered in New York.

"We are seeing a major shift in hedging mind-set especially when it comes down to U.S. corporates. They really have to sit down and rethink the potential costs of looking at hedging for the next six to 12 months," he added.

A look at the 12-month outright forwards market shows U.S. companies can still lock in fairly good rates for those with euro receivables.

The forwards market on Thursday is pricing in euros of around $1.4095 to the dollar in 12 months, not far from Thursday's spot rate of $1.4380, and much higher than, say, a Standard Chartered forecast for a one-year exchange rate in euro/dollar of $1.33.

By hedging through the forwards market, companies are protected from adverse movements in future currency rates, but they don't gain from favorable movements, said Fireapps' Koester who thinks this is the way it should be.

"At the end of the day, corporations are not in the business of speculating in currencies and they shouldn't have big gains or big losses in FX," Koester said.