Caterpillar (CAT), the maker of big yellow earth-moving equipment, just announced another round of layoffs. This time 10,000 people will get the axe, which is no surprise since the company has posted falling earnings for four straight years.
It’s also no surprise considering more than half of Caterpillar’s revenue comes from overseas. While their U.S. business is a bright spot in their financials, the outlook for the rest of the business is dim.
The company has taken a big hit because it sells equipment used mostly in mining and construction. Key mining industries such as coal and copper slowed down as commodities fell over the past several years. Construction in countries like China has also eased.
The hit to both of Cat’s main markets was painful, but it didn’t stop there.
In addition to flagging sales, the company also lost on foreign exchange. As the dollar strengthened since 2011, Caterpillar – and every other U.S. company with foreign sales – brought home less revenue when it converted money earned overseas into U.S. dollars.
According to Yellen and Company, that pain isn’t going to stop anytime soon. If the Fed hikes interest rates, the U.S. dollar will only get stronger.
Since the Fed’s last Open Market Committee meeting, several of its governors, including Chair Yellen, have spoken publicly about the possibility of rates moving higher by the end of the year. After a brief slide following the meeting, the U.S. dollar stabilized. If rates move higher by the end of 2015, then the U.S. dollar should make further gains.
So far, the damage to those who earn revenue in foreign currency has been extensive, but there is an upside.
China’s recent devaluation of the yuan dropped the currency by a mere 2% against the U.S. dollar. Because it can trade in a 2% band around the pegged rate, the currency fell another 1.9%, for a total drop of just under 4%.
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