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Analysis: U.S. firms' blaming dollar for weak profits may be premature

A customer counts her money while waiting in line to check out at a Target store in Torrington, Connecticut November 25, 2011. REUTERS/Jessi
A customer counts her money while waiting in line to check out at a Target store in Torrington, Connecticut November 25, 2011. REUTERS/Jessi

By Caroline Valetkevitch

NEW YORK (Reuters) - U.S. companies' warnings that a stronger dollar could drag on profits in the second half of the year could prove overstated.

The dollar has lately been defying expectations of a rise, weakening at a time when the betting had been on strengthening as the U.S. economy outpaced other major regions.

If the weakness continues, the dollar could become a help instead of a hindrance for companies that rely heavily on selling goods and services abroad, particularly if Europe shows additional signs of improvement and China's pace of growth becomes stable.

A pick-up in overseas sales would be boon for U.S. multinationals, whose second-quarter results fell short for companies that derive more sales from the United States.

"A headwind that they're expecting in the multinationals might not be there," said Paul Mendelsohn, chief investment strategist at Windham Financial Services in Charlotte, Vermont.

S&P 500 companies have made their complaints about the dollar loud and clear this earnings season.

Kimberly-Clark's chairman referred to a "more negative currency environment" while Procter & Gamble pointed to dollar strengthening and DuPont cited increased headwinds for diminished results.

A Reuters analysis of about 250 S&P 500 companies found that one of four this quarter cited their competitive disadvantage in selling abroad when the dollar is strong.

A negative currency effect is a particular worry among companies for the second half of the year - Colgate-Palmolive , among others, cut its full-year outlook due to the dollar's strength.

And it's no wonder many companies have that view. Most economists are forecasting the greenback will strengthen this year, with a Reuters poll released August 9 forecasting the euro will fall to $1.260 in six months. As of Friday, the euro was at $1.333. The dollar is expected to rise to 104 yen six months from now; it is currently at 97.59 yen.

Even though the dollar has shown a lot of volatility, it hasn't gained much this year, weakening recently against the euro, yen and pound. The U.S. dollar index <.DXY> is down 2.2 percent so far in the third quarter, and it is up just 2 percent since the start of the year.

LOOKING FOR AN EXCUSE?

The dollar may be an easy scapegoat for weak global growth. S&P companies with more overseas exposure underperformed in the second quarter, ranging from technology companies like Cisco Systems to staples like Wal-Mart Stores , both of which cited international weakness for lackluster results.

Year-over-year earnings growth for companies with more than half of their sales outside the United States fell far short of domestically oriented companies, declining by 4.9 percent compared with a 7.6 percent gain for more U.S.-oriented companies.

"Earnings have sort of gone nowhere fast, so perhaps (chief financial officers) are trying to justify a lack of earnings growth and using that as an excuse," said Martin Leclerc, chief investment officer and portfolio manager of Barrack Yard Advisors in Bryn Mawr, Pennsylvania.

While many companies have cited the dollar and the currency environment as a negative, most have offered few clues as to how they expect to deal with the negative effects from the dollar.

On its strategies for managing currency risk, Procter & Gamble said the company doesn't hedge translation exposure and prefers instead to use natural and operational hedges.

"It will have downward pressure, but I think it is premature to speculate as to what that would be," Clorox CFO Steve Robb said in an August 1 conference call.

Other companies have simply said they are monitoring the situation. Some even said the impact of recent dollar strength would be temporary; the dollar's recent pattern suggests they might be right.

(Reporting by Caroline Valetkevitch; Additional reporting by Chuck Mikolajczak and Julie Haviv in New York and Jessica Wohl in Chicago; Editing by Kenneth Barry)

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