Dive Brief:

• Multinational companies in North America and Europe reported $6.16 billion in negative impact from currency volatility during the fourth quarter of 2020, a 37% decline from the third quarter, according to a study by software company Kyriba.

• Currency exposure risk fell for North American companies during the quarter thanks to a decline in the value of the dollar and favorable trends in cross-currency valuations, according to Wolfgang Koester, chief strategist at Kyriba.

• The fourth quarter of 2020 was likely “the calm before the storm,” Koester said, noting that a rising dollar and cross-currency volatility during the first quarter of 2021 probably increased the negative impact from foreign exchange activity at many North American companies. 

Dive Insight:

Early last year, as the pandemic triggered financial instability and a “dash for cash” by many North American and European companies, the dollar rose and the negative impact from currency volatility surged, hitting $17.5 billion during the second quarter, according to Kyriba data.

During the first few weeks of the pandemic “everybody who didn’t understand their liquidity position drew on all the lines [of credit that] they possibly could,” Koester said.

Foreign exchange risks for North American companies steadily declined during the second half of 2020 as financial turmoil faded, economies stabilized and the dollar fell.

North American companies reported just $1.39 billion in negative impact from foreign exchange shifts during the fourth quarter compared with $14.16 billion during the second quarter, Kyriba said, adding in a footnote that “impacts are likely underestimates as most companies with currency headwinds generally do not report them.”

Companies in the Standard & Poor’s 500 Index face significant foreign exchange risks beyond gyrations in the dollar, Koester said. They generate about half of their revenues outside the U.S., represented by roughly 200 cross currency pairs.

During the first quarter the “strengthening of the dollar increased volatility,” he said. “Therefore I am 100% sure that the impacts on earnings of Q1 ending March 31 will be worse” than during the fourth quarter of 2020.

Kyriba tracks the impact of foreign exchange activity on assets and liabilities by analyzing earnings calls by 800 companies in North America and 400 in Europe.