Dollar gets faint boost from earnings repatriation
Thu Jan 20, 2005
By John Parry
NEW YORK, Jan 20 (Reuters) - A tax break for U.S. corporations repatriating overseas earnings is seen as a plus for the dollar, although the benefit could get lost in a host of other factors affecting the currency, analysts said.
Drugmaker Johnson & Johnson (JNJ.N: Quote, Profile, Research) said on Wednesday it would repatriate about $11 billion in past earnings, while Pfizer (PFE.N: Quote, Profile, Research) said it might bring in up to about $38 billion.
The latest announcements of such repatriation plans "have only added to bullish dollar sentiment," said Nandita Singh, currency strategist with J.P. Morgan Securities in New York.
However, a lot of the momentum pushing the dollar up this week has been fired by the prospect of rising U.S. interest rates, said Andrew Busch, global FX strategist with Harris Nesbitt in Chicago. Higher rates on short-dated dollar deposits tend to burnish the currency's allure to foreign investors.
The repatriation flows are a wild card that could yet have an effect in buoying the dollar.
"What is interesting is everybody detailing what they will bring back," said Busch. "There is a tremendous amount of money out there that could flow back into the United States, which has gotten it on everybody's radar screen," he said.
Busch expects about $200 billion of such flows into dollars as U.S. companies take advantage of this year's tax break.
A tax cut signed by U.S. President George W. Bush last year encourages multinational companies to return earnings from foreign subsidiaries to the U.S. at a tax rate of 5.25 percent instead of the normal 35 percent top corporate rate.
"It's a net positive for the dollar. But there is enough uncertainty in the market as to the ultimate impact -- for it to be an actual positioning move for a dollar revival, (rather) than a near-term excuse to buy the dollar," said Sean Callow, currency strategist at IDEAglobal in New York.
The euro this week fell below key technical support levels to two-month lows against the dollar as the U.S. currency strengthened on a chorus of Federal Reserve officials hinting the Fed may be willing to pick up the pace of rate increases.
Even so, some expect the repatriation flows could add to the dollar's upward momentum over the fairly near term.
"That money coming in now will have a much bigger impact on the euro going lower because of the fact that that is hitting precisely at the wrong time for people who are long euros. ...
"We could start to see some of that money flow back in earnest over the next two to three weeks," and the euro slip below $1.2700, Busch said.
Early on Thursday afternoon in New York, the euro was trading at $1.2960 . (Additional reporting by Gertrude Chavez) |
