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Wednesday, 20 September, 2000, 05:35 GMT 06:35 UK
Weak euro hits US firms
A McDonalds restaurant
McDonalds: converting European earnings to dollars hurts
By the BBC's Richard Quest in New York

As the chief economist of the IMF has suggested in Prague, the weak euro might be a real problem - requiring intervention by the European Central Bank - so there was a concrete reminder of the problems facing global companies as they battle the falling euro.

First it was hamburgers, then soap, now razors. The world's largest companies are all starting to cry about the sharp fall in the euro.

Gillette - the world's largest seller of razors and blades - is the latest international company to be hit by the falling euro.

The company has warned the market that the 20% dorp in the european currency would hit its next earnings report.

Although sales have remained strong, the effect of the drop in the euro has been to diminish the value of the profits.

Gillette generates about 60% of its business outside the United States.

Gillette is in good company as it is hit by currency woes.

Strong dollar

McDonalds, the fast food giant, saw its shares fall to their lowest level in two years as it said the strong dollar was hitting its non-US business.

And Colgate-Palmolive, which makes household products like Colgate Toothpaste, soap and Palmolive soap, was downgraded by leading Wall Street firms because the currency effect was devaluing its profits.

The problem for all these companies is that they earn huge parts of their profits in local currencies, such as francs, marks and lira, which then have to be converted back into dollars for their annual balance sheets.

Because these currencies are now part of the euro, which has fallen by 25% since its launch in 1999, this dramatically cuts the profits.

The stock market has been punishing in its treatment of the three: Gillette saw its share price fall by 9% after it made the announcement and the stock now stands at a four-year low.

Even worse, Colgate's shares dropped 17% after the downgrade and Wall Street doesn┐t expect much improvement anytime soon.

Better returns

The reason the euro has fallen so far so fast has been well documented: worries about the strength of European growth together with a view that the US offers better returns and higher interest rates have all had an impact.

Other international currencies such as the Australian dollar and New Zealand dollar, which often track the euro┐s fortunes, are also in the doldrums trading at all-time lows against the US dollar.

The greenback remains master of all it surveys - king of the foreign exchanges for the time being.

And although analysts believe that this will eventually turn round; that is too late for these companies which are already feeling the market's wrath.

There is some upside to the euro's demise. Europe-based companies are enjoying an export-led boom as the weaker currency makes their goods more attractive.

But that is cold comfort to those global giants that have to take their euro cash and turn it into stronger currencies - and these days that still means the mighty dollar.

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19 Sep 00 | Business
IMF calls for euro intervention
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