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NEW YORK (Reuters) - The sluggish U.S. economy is proving to be a relief for U.S.-based companies struggling under the weight of the strong dollar and could lead to more positive earnings surprises in the weeks ahead.
Companies including Whirlpool Corp (WHR.N), Johnson & Johnson (JNJ.N), and Xerox Corp (XRX.N) have told investors over the last two weeks that they see the pain from the dollar's two-year rally easing, allowing them in some cases to beat earnings estimates and raise their outlooks for the rest of the year.
Less well-known companies are benefiting, too: insect repellent company Rollins Inc ROL.N said the weaker dollar was a key reason why it beat estimates when it announced its quarterly results Wednesday, while medical supply maker C.R. Bard Inc (BCR.N) cited the weakening of the dollar when it announced that it was raising its guidance for the year.
"We think we've seen an inflection point where for the balance of the year there should less of a drag from currency," said Phil Orlando, equity strategist at Federated Investors.
The dollar has backed off from 12-year highs it reached in November against a basket of other major currencies .DXY as U.S. gross domestic product numbers flatlined, leaving many investors to assume the Federal Reserve will delay raising interest rates. The dollar hit an 11-month low on Friday.
A weaker dollar helps U.S. companies by making their products cheaper overseas, while also boosting the value of revenues earned in local currencies when translated back into dollars. Most large companies hedge at least part of their foreign revenues, so the effect of currency fluctuations often translates to less than 5 percent of total earnings, Orlando said.
Yet at a time when many companies are struggling to post any year-over-year earnings growth, unexpected relief from the strong dollar blues could be enough for them to beat estimates and send shares higher.
Johnson & Johnson, for instance, said the strong dollar took a 3.3 percent slice out of global sales in its first quarter, half of the impact from the quarter before. Its shares rose 2.7 percent after it reported its results, hitting a record high.
Overall, 72 percent of U.S. multinational companies – those which would see the largest impact from currency fluctuations – have beat earnings per share estimates this quarter, in large part because of the dollar’s decline, according to Thomas Lee, managing partner at Fundstrat Global Advisors.
In a sign that the dollar's slide should continue to help for the remainder of the year, analysts have raised their earnings per share estimates for 57 percent of multinationals, by an average of nearly 1 percentage point, he said.
The dollar's retreat comes on the heels of the fourth quarter of 2015, when currency translation took $33.94 billion out of North American company revenues, the worst negative impact in nearly five years, according to research firm FireApps.
Fund managers, meanwhile, say that the weaker dollar will help stabilize commodity prices, which are often priced in dollars, helping both energy company earnings and overall investor sentiment.
With lower currency costs and an easing of fears that sustained oil prices below $30 a barrel will lead to deep layoffs among energy companies, a "weaker dollar makes things easier from here on out," said Mike Balkin, a portfolio manager at William Blair.
Reporting by David Randall; Editing by Linda Stern and James Dalgleish