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European tech firms first to take dollar hit

Source: Reuters - Thu 24th Sep 2009

A sharp fall in the dollar threatens to hurt an incipient recovery in several European industry sectors, with technology firms and some drugmakers among the first to feel the pinch.

The U.S. dollar has dropped almost 4 percent against the euro in the last two weeks alone to around 1.47, as investor risk appetite has increased, and the greenback is down 15 percent in the last five months.

After sharp swings on the currency markets last year, companies have learned to better hedge against potential losses, analysts said, but the latest fall in the dollar is still expected to impact many firms in the coming months.

"It's not all going to hit today but it's going to, stage by stage" said Edmund Shing, equity derivatives strategist at BNP Paribas in Paris.

Within Europe the technology sector is the most exposed to other currencies, with 64 percent of sales taking place outside Europe. For the healthcare sector, 49 percent of sales were outside Europe in their last fiscal year.


For the European technology sector, a weaker dollar means lower sales and profits, but margins are hurt less as most of the electronics components are priced in dollars.

"For the technology sector a weaker dollar causes quite a lot of problems on the revenue line" said Richard Windsor, technology specialist at Nomura. 

Jari Honko, analyst at eQ Bank in Helsinki, said the weaker dollar is cutting sales at Europe's top technology firm Nokia and hurting reported profits.

Nokia is a small player in the U.S. phone market, with smaller than 10 percent market share, but around 50 percent of its annual sales of 50.7 billion are tied to dollar or dollar-linked currencies.

Even small changes in the currency market can have a devastating effect on the consumer electronics industry because profit margins are a narrow 5-6 percent at the best of times, and often well below that.

Technology makers across the board are impacted.

"The classic sectors that get hurt are areas based in aerospace and defence" said BNP's Shing.

"EADS is a prime example because they export in dollars, and their biggest competitor is the (U.S.-based) Boeing - so obviously that's a big help for Boeing and a big negative for EADS in competitive terms," he said.


Currency fluctuations are also a big swing factor for European-based drugmakers, reflecting their global presence and heavy exposure to the U.S. market.

The strengthening of European currencies will remove a favourable tailwind enjoyed by some firms in previous quarters. 

GlaxoSmithKline, Europe's biggest pharmaceutical company, sells more than 40 percent of its products in the U.S. market and has gained markedly from the weakness of sterling against the dollar this year.

However, many investors have learnt to look through such currency effects to the underlying picture, helped by the decision of many companies to give numbers that strip out currency effects alongside reported results.

Two of Europe's biggest pharmaceutical groups - Novartis and AstraZeneca - have got around the problem by reporting in dollars.

Among drug companies reporting in euros, as opposed to pounds or Swiss francs, exposure to the United States is less. Sanofi-Aventis generates less than a third of its revenue in the United States and Bayer BAYG.DE under a quarter.

Not all sectors are suffering, though, with some retailers winning as they import from the Far East where their cost base is in U.S. dollars and they sell in stronger euros or sterling - boosting their margins.

UniCredit said provided the dollar's fall was gradual, it did not expect a weakening to even 1.60 to change the positive trend in the equities markets.

"An "abrupt" massive depreciation would, however, be problematic, since it would signal a simultaneous loss of confidence in the USD on the part of many investors and would therefore point to a material change in the macro environment in general" UniCredit said in a research note on Friday.

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