Booms, Busts, and Recoveries Message Board

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Strategies & Market Trends : Booms, Busts, and Recoveries

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To: tradermike_1999 who started this subject	5/7/2003 2:00:52 AM
From: elmatador	Read Replies (1) of 74559

Lex: Euro strength Published: May 6 2003 13:01 \| Last Updated: May 6 2003 13:01 Reporting in constant currencies provides a convenient fig leaf for European multinationals suffering from the strong euro. For many, it is also reasonable. The likes of Unilever and Nestlé both incur costs and collect revenues in a variety of currencies. Showing investors how the underlying business is performing is helpful. While overall profits will be affected by currency fluctuations, the natural hedge of operations should, usually, limit the impact on margins. For others currency effects can be structural, and huge. EADS is a good example. Airbus, its main business, earns all of its revenue in dollars. Only half of that is set against dollar-based costs such as airline engines and aluminium. For the remaining €9bn or so, the strength of the euro - up 27 per cent against the dollar since the start of 2002 - represents a big headache. The pain is put on hold by Airbus's extensive currency hedging programme. Without that, this year's expected profits of about €1.4bn would be effectively wiped out. But if euro strength persists, the exposure will start to hurt. EADS is planning cost cuts of about €1.5bn, partly to combat the currency threat. It is also looking at ways to balance its exposure, such as invoicing some aircraft in euro. Other industries such as luxury goods face similar problems, again largely hedged. But the currency risk is real. Coupled with the sharp downturn in aircraft demand - as well as luxury goods - the earnings impact when hedging cover reduces could be substantial. Investors will have to watch for changes in the dollar/euro rate almost as closely as they look for signs of a cyclical recovery.

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