Factors weighing on the US dollar
Earlier in this series, we discussed IBM’s (IBM) strategy for growth by an increased focus on the cloud, especially the hybrid cloud. IBM generates significant revenues outside the United States (SPX), which exposes it to the vagaries of the US dollar.
In early November, Republicans in the US Senate said that like the House of Representatives, they want to cut the current corporate tax rate of 35% to 20%. However, they intend to put this plan into effect in 2019 rather than immediately.
The uncertainty over the Trump administration’s proposed tax reform and its impact on the economy weighed on the US dollar. Concerns that corporate tax cuts in the US could be delayed to 2019 has significantly impacted the dollar.
In the last two months, the US Dollar Index has gained about 3.0%. The increased optimism of tax reform boosted the dollar.
Citing Boris Schlossberg, managing director of FX strategy at BK Asset Management, The Business Times reported, “Markets are becoming concerned that this is not a serious piece of legislation and that there really is no political support necessary to pass it.”
IBM’s exposure to the dollar
IBM derives close to 53% of its revenues from outside the United States, as the chart above shows. As a result, the strengthening of the US dollar (UUP) against major currencies impacts its revenue growth.
Oracle (ORCL) and Microsoft (MSFT) also generate more than half of their revenues from outside the United States. The tech sector, especially these companies, can be particularly vulnerable to the fluctuations in the US dollar.