Question

Suppose, in the preceding year, the U.S. dollar strengthens against other currencies. Explain its effect on U.S. dollar revenues and expenses for a global firm headquartered in the United States.

Please don't hand write.

Thank you.

Answer 1

Strong Dollar - when the U.S. dollar strengthens in value against other currencies it is called a Strong Dollar. A strong dollar has several positive as well as negative impacts. It tends to affect different groups in the economy differently.

Effect on revenues and expenses for a global firm headquartered in U.S. -

1. If the company imports raw material, like machinery or equipment, it will have a lower production cost and enjoy larger profit margins.

2. As opposed to an importer reaping benefits,if the firm is an exporter, the exports will become expensive abroad. This may compromise employment of Americans in export related industry.

3. While strong dollar may benefit Americans in many ways, it can be cause losses for U.S.companies and its investors, who conduct business worldwide.   

4. U.S. based companies suffer as sales in foreign countries will reduce in value, which will then reflect in the balance sheet.

5. If the global firm is a manufacturer, it will be especially hit hard. It may lead to reduction in overseas demand which in turn will cause a reduction in the revenues and profitability of a firm as a whole.

Overall, whilst U.S. consumers benefit due to low cost of imports, a Strong Dollar has a more negative impact on multinationals, manufacturers and resource producers.