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Dollar Translation Effects Are Significant, but Not New NewsJeff Bagley
4/9/2009 12:38 PM EDT From a corporate fundamental perspective, I always think about the effects of foreign exchange in two different ways: (1) the real economic effects that stem from changes in the relative competitiveness of U.S. products (i.e., a weak dollar makes U.S. goods more attractive for foreign purchasers), and (2) the accounting translation effects. The second point is probably the most problematic with the dollar's resurgence in recent months, as U.S. corporations have been hit with a double whammy: falling real demand for products as economic activity has fallen off a cliff, plus the unfavorable translation effects from the stronger dollar. We've seen this on the part of many industrials lately, and also in a big way in the health care and consumer staples sectors. What was a tailwind for a number of years has now turned into a headwind, and the effects are actually very significant. For example, orders might be down 17%-18% on a constant currency basis, but they are actually down 25% or so on a dollar basis. Given that the euro started to crack only in the latter half of last year, we will be dealing with very difficult year-over-year comparisons for the next couple of quarters at a minimum.