When Exchange Rates Move, U.S. Companies Feel It — Even More Than Previously Thought

Firm-specific export data enables researchers to potentially solve a puzzle in economics

Japan has a tempting new attraction for tourists — a weak currency. The country lured a record 36.9 million visitors in 2024, attracted by a yen that lost half of its value against the U.S. dollar since late 2020. This turned Japan into a bargain destination for international travelers.

What’s good for tourists may also be a boon for Japanese business. A weaker currency can make exports cheaper and more attractive abroad. One of Japan’s largest exporters, Mitsubishi Heavy Industries, has seen its stock soar while another, Toyota Motor Corp., saw profits rise despite a scandal this summer around safety certification irregularities that negatively impacted sales at home.

Yet, past research struggles to find a strong impact from U.S. dollar movements versus other currencies on U.S. stock returns. This has been coined the “exchange-rate exposure puzzle.” The weak association is surprising to economists given the substantial role international trade plays in the U.S. economy and the dramatic fluctuations in exchange rates that occurred from 1999 to 2019 — the euro varied between $0.84 and $1.59, and the yen swung between 80 and 360 yen to the dollar. (See graph above headline, showing the dollar against a basket of other currencies.)

A working paper by UCLA Anderson’s Ivo Welch and Chinese University of Hong Kong’s Yuqing Zhou may finally solve the puzzle. Their work proposes that currency movements have a much bigger impact on American companies than previously thought, particularly in the more recent years. In fact, their study suggests that exchange rate movements significantly influence U.S. companies’ exports, sales, profits and stock returns during the period they examined —1992 to 2016.

Firm-Specific Data Sharpens the Analysis

The key to their finding was gaining access to data with firm-specific information about exports — a granularity that earlier studies lacked. Without firm-specific export data, past researchers’ efforts could be compared to forecasting a store’s sales using industrywide statistics rather than the store’s own transaction records.

The data the researchers tapped into was the Census Bureau’s Longitudinal Foreign Trade Transactions Database, which provides transaction-level data for all physical exports, including export records for companies. This data includes destinations, dollar values and product details.

Welch and Zhou combined the LFTTD data with historical exchange rate information from the International Monetary Fund and financial performance metrics from Compustat and CRSP databases in order to precisely track how currency changes affected individual companies’ international exports, sales, profits and stock returns. With this data, they created a firm-specific measure. 

The researchers’ metric weights exchange rate changes based on each company’s specific mix of export destinations. This is important because one company might be exporting to a country where the dollar appreciated against the local currency while another company might be chiefly exporting to countries where the dollar weakened against the local currency. They also filtered the data for companies where exports accounted for at least 1% of total sales in order to ensure their findings reflected export-reliant firms rather than the broader market.

Currency Depreciation Provides Firms a Double-Whammy Sales Advantage

With their measure in place, the researchers analyzed the exchange rate sensitivity on firm exports, sales, profits and stock returns. Their findings suggest that when the U.S. dollar weakens by 1% against another country’s currency, U.S. exports to that country typically increase by 0.4% to 0.6%. (The effect was even stronger when a company was large or their business was very export focused.) 

In the case of total sales (international and domestic) of U.S. companies, these grew by 0.6% to 0.8%. The increase in sales reflects more than just the bump in exports because local sales for the companies rise too as the products of foreign competitors become more expensive when their currencies strengthen versus the U.S. dollar.

The researchers’ analysis also proposes that a 1% depreciation in the U.S. dollar led to both a 0.2% increase in firms’ profitability and in their stock returns. The researchers found these effects to grow stronger for exports, sales and profitability over time as global trade increased and world markets became more integrated. From 2004 to 2016, the impacts were about 50% larger than in the earlier years of their sample data. 

However, the sensitivity of stock returns to exchange rate moves has not increased. This may be because investors have become good at anticipating the impact of currency moves on firms. The markets are efficiently pricing in these currency effects.

Welch and Zhou note that the increased exposure of companies to currency moves makes them, “potentially also more exposed to exchange rate interventions by foreign and domestic national reserve banks.” And while some companies do hedge currency risks, the study shows that currency movements still substantially impact bottom-line results. This contradicts previous researchers’ suggestion that companies fully hedged away the currency effects and that is why the impact was not seen in stock returns.

The research demonstrates that currency movements matter more than previously thought — especially for larger companies and those with significant international sales — and its effects can ripple through multiple aspects of a business’s performance.