MW U.S. companies will need to increase their hedges against a stronger dollar in 2025, says Bank of America
By Jamie Chisholm
The U.S. dollar is likely to keep strengthening this year, so American corporations should increase their hedges against a stronger buck, according to Bank of America.
"In 2024, U.S. corporates could afford to wait for the USD spot price to weaken before repatriating overseas earnings back to [the] U.S.," said Howard Du, G10 FX strategist at Bank of America in a note published Thursday.
However, he added: "In 2025, the macro backdrop calls for increased USD hedging vs. the past year, as consensus forecasts see USD spot ending 2025 stronger than 12-month forwards prices against many global currencies."
The U.S. dollar index DXY, which is a trade-weighted measure of the greenback against some other major currencies, this week rose to its highest level in more than two years, a move that can make U.S. imports cheaper but can also hit profits of America-based multinationals.
The S&P 500 index members on aggregate get 41.6% of their revenues outside the U.S., according to FactSet. If the dollar strengthens those sales can be worth less when translated back into bucks at the end of a quarter.
Consequently, corporate finance departments hedge against such an outcome, usually by purchasing a forward contract that locks in an exchange rate at a certain level for a period of time.
There is a cost to such hedging, so U.S. multinationals are unlikely to do it if they think they will benefit from a weakening greenback. That was the case in 2024, Du noted.
"As markets headed into 2024 a year ago, the consensus view was bearish for the USD. Market participants broadly expected the Fed to start the rate cutting cycle in 2024, which should act to further weaken the USD after the Q4 '23 selloff," he said.
"U.S. corporates could afford to leave foreign exposures unhedged heading into 2024, and the market had delivered," Du added.
But the macroeconomic backdrop is significantly different heading into 2025, reckons Du. Forecasters generally now see a stronger dollar following the re-election of Donald Trump, with the consensus notably bearish on the euro and Swiss franc, for example.
Global trade uncertainty and tariff headlines could drive the USD initially higher in 2025, Du noted, and the current level of implied volatility pricing would suggest any tariff risk premium is not yet fully priced-in.
"A combination of trend and the carry factors also discourages USD bears from fading the USD uptrend, unless a series of pivotal catalysts emerge," said Du. "Carry" refers to the trade whereby investors use money from a low interest rate country to invest in assets of a country with a higher rate.
In summary, Du said that given the likelihood of near-term USD spot uptrend continuation, and the favorable risk-reward of owning USD call options - conferring the right to buy the dollar at a particular price - U.S. corporates heading into 2025 should "hedge now, worry later."
Whether the USD overvaluation could start to normalize by mid-2025 would depend on the tariff outcomes and U.S. fiscal policy, he said.
-Jamie Chisholm
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
January 09, 2025 07:44 ET (12:44 GMT)
Copyright (c) 2025 Dow Jones & Company, Inc.
