Political turmoil weakens US currency

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Donald Trump

Political turmoil in the United States is weakening the value of American currency. Speaking at a press conference at the World Economic Forum in Davos last week, US Treasury Secretary Steven Mnuchin stated, “obviously a weaker dollar is good for us as it relates to trade and opportunities,” adding that its short-term value is “not a concern of ours at all.”

Shortly afterward, President Trump told reporters Mnuchin’s comments were “misinterpreted” and stated that “the dollar is going to get stronger and stronger, and ultimately I want to see a strong dollar.”

At the same time, Trump also announced last April: “I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me. But that’s hurting — that will hurt ultimately.”

Those comments were made after four months of the dollar sliding against other currencies. They also helped stoke a further drop in valuation. And since then, the US dollar has been on a generally negative trajectory — not unrelated to the lack of any clear US policy.

The formerly strong US dollar began to have a notable impact on Apple’s earnings reports starting in 2014, and has repeatedly been cited by the company as negatively affecting its earnings in a number of ways. So for Apple, a weaker dollar is a welcomed change.

“The formerly strong U.S. dollar began to have a notable impact on Apple’s earnings reports starting in 2014 and has repeatedly been cited by the company as negatively affecting its earnings”

In its Fiscal 2014 10K filing, the company noted that weakening foreign currencies “adversely affects the US dollar value of the Company’s foreign currency-denominated sales and earnings,” and added that a stronger dollar generally results in the company being forced to raise its prices overseas, with the potential result of reducing demand as buyers balk at paying more for the same thing.

In 2015, the strengthening dollar caused Apple to raise prices in its stores ranging from Australia, Canada, New Zealand, France, Denmark, Sweden, Finland and Portugal.

In the summer of 2016, Britain’s vote to leave the European Union caused the British Pound to fall dramatically against the dollar, resulting in an up to 20 percent price hike on some Mac models in the UK, followed by a 25 percent hike in price tiers in its App Store earlier this year.

Last January, Apple’s chief executive Tim Cook noted that China’s currency had devalued by 6 percent year over year compared to the dollar. The shift was large enough to prompt the company to report non-GAAP earnings on a constant currency basis to isolate its actual performance from the currency shifts out of its control.

Other American companies operating internationally have suffered from the same unfavourable currency headwinds, although Apple generally weathered these fluctuations better than many of its peers simply because it is so profitable and because it has the capital and credit to enter long-term hedging contracts to mitigate risk.

At the same time, the impact of foreign currency shifts in China has been a much larger issue for Apple than companies like Facebook, Google, Microsoft and US hardware makers–few of whom have been able to materially penetrate the Chinese market at all, let alone making it a leading chunk of their business.

Apple also took advantage of the stronger dollar’s purchasing ability to invest in large infrastructure, production and retail projects internationally, including a series of new retail stores in China, its massive new Battersea Power Station development in London, and a string of research and development facilities being built around the world.

Strong earnings in the year-ago winter quarter jolted Apple’s stock price upward despite foreign currency headwinds. Apple shares continued to rise on apparent optimism that a new Republican president–backed by Republican control of both chambers of Congress–could quickly implement business-friendly tax breaks, including lower repatriation rates on Apple’s very large overseas earnings.

However, that optimism turned out to be misplaced. Efforts to slash health care spending to enable very large tax breaks was derailed by populist resistance that fragmented the controlling political party, delaying the passage of health care cuts and efforts to shift tax policy to the end of 2017.

Proposed travel bans, restrictions on visas, the halting of infrastructure spending and the postponement of a repatriation tax holiday that Apple and other Silicon Valley companies had been working with Hillary Clinton to draft as part of a series of tech-friendly policy positions remained causes for concern throughout the year. — AFP.

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