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Big technology companies are reaping the whirlwind of a strong dollar, as the sector becomes an unlikely victim of foreign exchange volatility.

Why it matters: In normal times, car companies and other multinationals that sell physical goods are the most sensitive to dollar fluctuations. Needless to say, with interest rates soaring alongside inflation expectations – even as growth falters – these are hardly normal times.

The Federal Reserve’s offensive against spiking inflation is pushing up rates. That's boosting the greenback’s value in major markets like Europe, where a strong greenback has railroaded the common currency to a 20-year low.  

Driving the news: During the Q2 reporting season, Netflix, Google, IBM, Microsoft, Apple and Spotify are among big tech names citing the “super dollar” as a drag on earnings. 

Particularly against the euro and yen, the U.S. currency is creating what the Financial Times referred to last week as a “currency shock [that’s] muddled an earnings period that was being closely studied for signs of a weakening global economy.”

It’s unusual to see big tech (certainly not this many companies at the same time) cite currency volatility as an issue. Most of them sell software-based services, rather than physical goods like cars or makeup.

What they’re saying: Still, foreign exchange volatility is “a headwind for Big Tech with 35% to 40% of sales in Europe, and strong dollar a 400 [basis point] top-line headwind,” veteran tech analyst Dan Ives tells Axios in an email.

“As they sell in local currency this will be a negative theme over the coming year with a strong greenback,” he added.

Yes, but: Traditionally, big companies employ sophisticated hedging strategies to guard against FX risk. 

U.S. manufacturers and big auto companies, where pleas for government intervention to soften the dollar during cyclical bull markets have often fallen on deaf ears, know this firsthand.

What we’re watching:  The Fed’s next policy moves. If the current economic angst gives way to a deep recession, the central bank may reverse course. That would narrow the interest rate differential boosting the greenback. 

Dollar's gain, Big Tech's pain

The strong dollar is creating big headaches for U.S. multinationals.

Illustration of a dollar sign being formed by jet streams.

Currencies

Trade war

After a record economic expansion, the coronavirus pandemic sent the U.S. economy into a recession as unemployment soared to staggering heights. The country now faces urgent questions about how much stimulus is needed for reeling consumers and businesses, and what a recovery might look like.

Economy & Business

 The U.S. dollar has emerged as the biggest beneficiary of the recession fears ricocheting across markets. It has left a few winners — but lots of losers — in its wake.   

Why it matters: A combination of safe-haven buying and interest rates has sent the undisputed heavyweight champion of global reserve currencies to its highest levels in at least two years against major counterparts. That comes with a mix of positives and drawbacks, some of which will become apparent as second quarter earnings start rolling in.

Yields that offer higher returns than other global currencies are boosting the dollar’s value, and helping restrain import inflation. 

As Axios’ Courtenay Brown points out, it’s a good time for American tourists to visit Continental Europe, with the euro lodged near a 20-year low.

But multinational companies will inevitably feel the pain when translating foreign earnings from battered currencies into dollars, impacting Q2 results. 

Zoom out: The muscular dollar may also create political headaches for export-reliant economies like Japan and the euro zone, whose goods automatically become cheaper in foreign markets. 

That sparks accusations of “beggar-thy-neighbor” FX policies, where cheaper goods get a boost from the weaker currency in foreign markets, even as domestic inflation rises.  

It can lead to trade wars, and potential charges of “currency manipulation” by U.S. authorities.

What they’re saying: Nick Colas, DataTrek’s co-founder, noted last month that the dollar’s “remarkable” strength has played a role in every major market meltdown since 1970.

“To see so many of the developed world’s major currencies either at or through multi-year lows to the greenback is very concerning,” Colas wrote. 

“We doubt global equities can stage any meaningful recovery until currencies stabilize and [we] worry that further weakness here will cause further stock market declines,” he added.

Our thought bubble: Despite being a fiat currency sandbagged with soaring inflation, endless government deficit spending and a sclerotic political system, the dollar once again proves it's the "cleanest dirty shirt" in the global financial system.

The dollar’s "remarkable" double-edged sword

The dollar is perched at a 2-year high, and that's both a good and bad thing.

Illustration of a pattern of dollar bills fading from left to right.

Total official international development assistance from the <span style="color: white; background-color:#0b6abf; padding: 0px 4px; display: inline-block; margin: 5px 0px 0px; white-space: nowrap; font-weight: 900;">U.S.</span> and <span style="color: white; background-color:#ff4e1f; padding: 0px 4px; display: inline-block; margin: 5px 0px 0px; white-space: nowrap; font-weight: 900;">China</span>

Note: Includes official development assistance and other official flows; Data: AidData; Chart: Axios Visuals

The G7 unveiled a plan this week to invest $600 billion in infrastructure projects in developing countries. 

The program, which flew a bit under the radar as escalating sanctions against Russia took center stage in the German Alps, has the potential to strengthen the U.S.’s foreign relationships, while also funneling economic benefits back home. 

Why it matters: The Partnership for Infrastructure and Investment (PGII) appears to be a bid to counter China’s influence across a wide swath of the world. 

Over the last two decades, China's morphed into the single largest lender to lower- and middle-income countries, igniting Western concerns that it’s using its coffers as a tool for influence and control over countries badly in need of development funds.  

"Competition between the US [and its partners] and China is increasing. China's international posture has become much more visible and assertive," says Jeremy Mark, senior fellow with think tank the Atlantic Council. "And China is miles ahead of the U.S. in any number of countries — because of the attention they pay and the assistance they lavish."

The big picture: China’s ambitious lending program, The Belt and Road Initiative (BRI), launched in 2013. It was a way for China to invest its massive surplus of dollars, while creating buyers for things like steel and aluminum that it produced — and securing access to key natural resources that it lacked.

But the BRI is now in a state of crisis as sovereign debt distress spreads. For example: 60% of BRI loans are to countries now in financial distress compared to 5% in 2010.

Meanwhile, 35% of the BRI infrastructure project portfolio faces a major implementation problem, according to AidData, which maintains one of the most comprehensive datasets on Chinese development finance.

During its peak years, BRI was lending about $85 billion per year, per AidData; that’s down to about $14 billion last year, Bloomberg reported.

The intrigue: The most destructive part of BRI, critics say, is the "debt trap" it lays for poor nations who will be forced to turn over possession of key infrastructure to China when they can't repay their loans. 

Although that kind of asset seizure has not actually taken place (as The Atlantic explains), China's loans have in many cases saddled poor countries with too much debt — and it's been unwilling to engage in constructive restructuring talks. 

At the same time, BRI projects have had a mixed effect on local public opinion about China; and their presence can make local governments nervous about pushing back on things like environmental standards.

Taken together, these developments create an opening for the G7 to make a move, says Brad Parks, AidData's executive director and lead China researcher. 

Meanwhile, a re-branding: This week’s PGII announcement was really a re-launch of the Build Back Better World partnership announced at the June 2021 G7 meeting. 

That program struggled to sign on international partners — and was saddled with a name that evoked President Biden's failed domestic legislation. 

As part of the fresh PGII, the U.S. pledged to mobilize $200 billion over the next 5 years, via a combination of federal financing, grants and private sector investments. Flagship projects detailed in the re-boot announcement show U.S. companies will benefit from contracts to complete some of the work. 

Given how debt-saturated many lower-income nations are, the program will probably need to lean more heavily on investments than on lending.

"The question is, can you pull together mixed sources of financing to continue an infrastructure push in countries that have basically reached their limits in terms of debt," Mark says. 

Between the lines: If PGII is a play to significantly boost U.S. influence, it's probably too little, too late, given the numbers involved, he adds. 

But if implemented well — an open question, given the tangle of U.S. agencies involved, and coordination with other G7 countries — the plan could offer a small minority of the 140 BRI recipient countries a viable alternative to Chinese purse strings. 

The bottom line: "I think [the G7] are trying to change the narrative, create more choice in the infrastructure financing market — and pick off some of the countries that have a bad taste in their mouth from their experience with BRI," says Parks. 

G7's $600B infrastructure bid to counter China

China's now the single largest lender to developing countries, igniting Western concerns that it’s using its coffers as a tool for influence

Debt

Total official international development assistance from the U.S. and China

Business Roundtable CEO Economic Outlook Index

Data: Business Roundtable; Chart: Axios Visuals

How America's top CEOs are feeling about the economy depends on if you're a glass-half-full or half-empty type.

What's new: As of early June, the 177 leaders of America's biggest companies surveyed by the Business Roundtable (BRT) were still planning to hire and invest at high rates, according to data shared exclusively with Axios. 

But their outlook deteriorated rapidly compared to early March — the sixth-fastest drop in the 78 quarters the survey has been conducted.

Why it matters: More executives pulling back on hiring and capital spending implies a slowdown in the last year's booming growth — and an economy that is more vulnerable to recession.

Details: The survey was fielded before last week's hotter-than-expected inflation print, the stock markets' plunge into bear market territory, and fresh signs the Fed is considering the steepest rate hike in 28 years. But the data points to more caution around hiring and capital expenditure plans, as well as sales forecasts. 

50% plan to increase employment levels in the next six months, down from 68% last quarter.

47% say they will increase capital investment plans within that time frame, down from 60% last quarter.

72% expect sales to increase in the next six months, 10 percentage points less than last quarter.

What they're saying: "The softening of quarterly CEO sentiment reflects uncertainty driven by the unprecedented times we face as a nation and global community," General Motors chief executive Mary Barra, who chairs the Business Roundtable, said in a statement.

Between the lines: In a way, the results hint at exactly what the Fed wants but may not be able to pull off: chilling demand to tame inflation, but without throwing the economy into a recession.

Softening expectations among executives are dragging the index down, but — for now — it remains above the levels that would signal a recession.

Josh Bolten, CEO of the BRT, said that Congress and the Biden administration should "pursue policies that alleviate inflationary pressures and promote long-term growth."

He urged the Biden administration to "double down on domestic energy investment" and lower tariffs.

Barra urged Congress to pass legislation that would fund the so-called CHIPS Act, a bill that passed with bipartisan support that would expand domestic semiconductor chip manufacturing capacity. 

Over half (56%) of CEOs surveyed by the group said they either faced delays or challenges delivering goods to customers, higher costs, or both, thanks to a chip shortage.

The bottom line: Executives don't necessarily think an "economic hurricane" is coming, as JPMorgan Chase chief Jamie Dimon memorably said recently. But they are decidedly bracing for a slowdown.

Survey: CEO confidence falls, but isn't all bad

Executives still plan to hire and invest, but their outlook deteriorated rapidly, data shows.

CEOs

Jobs

Sneak Peek

Axios Sneak Peek

President Biden is facing public pressure from America's leading unions on an issue that has divided his top advisers: extending former President Trump's China tariffs on approximately $300 billion worth of Chinese goods.

Why it matters: The Biden administration is engaged in an intense internal debate on whether to waive some of the so-called Section 301 tariffs to help ease inflation — the top issue roiling Biden's presidency.

By filing an official comment with the Office of the U.S. Trade Representative Monday evening, union leaders are going public with what they've been saying in private: they expect Biden to keep all of Trump's tariffs in place.

"Our government must act in the national interest to strengthen our economy for the future," writes Thomas Conway, the president of the United Steel Workers, in a comment filed on behalf of the Labor Advisory Committee for Trade Negotiations and Trade Policy.

Context: Biden, who prizes his relationship with organized labor, has taken pains not to aggravate union leaders and is deeply hesitant to cross them. 

But fiddling with Trump's tariffs is one of the few dials the president has that can marginally affect the inflation rate, which currently sits at 8.3% and is clearly spooking Democrats heading into the midterms. 

Driving the news: Commerce Secretary Gina Raimondo said Sunday that it "may make sense" to lift some of Trump's China tariffs and mentioned specific products — like bicycles — that could be exempted. 

"I know the president is looking at that," she said on CNN's "State of the Union."

Raimondo is joined by other Biden officials, like Treasury Secretary Janet Yellen, in arguing behind the scenes that removing some tariffs could ease the pain for Americans fed up with high prices. 

On the other side are officials like U.S. Trade Representative Katherine Tai, who argues that the U.S. should take a more strategic approach to the tariffs — both to protect American workers and to maintain leverage over China.

Fighting inflation should not be reduced to a "singular focus" on China tariffs, Tai said Monday, making her case for a "thoughtful, deliberate, strategic" approach to the U.S.-China trade relationship.

The big picture: With record-high gas prices reminding Americans every day that inflation is soaring, the White House is looking for ways to show voters it is serious about bringing down costs. 

Politically, there's no debate that it's taking a toll — just 28% of Americans approve of Biden's handling of inflation, according to a recent survey from ABC News/Ipsos.

Biden has repeatedly said in recent weeks that fighting inflation is his "top priority," but officials know they have limited tools to bring it down quickly. 

Top officials suspect that removing Trump's tariffs would have only a marginal effect on the overall inflation rate, about 0.26%, according to one study.

Biden has released oil from the Strategic Petroleum Reserve to lower gas prices and is soon planning to visit Saudi Arabia, which just announced plans to increase its oil production.

Some Democrats are clinging to hopes that Sen. Joe Manchin (D-W.Va.) might agree to a climate and energy package that would also force the pharmaceutical industry to negotiate directly with Medicare, lowering prices for consumers. 

Between the lines: The Labor Advisory Committee wants to bolster domestic production and manufacturing but also needs America's business community to take potential threats from the Chinese Communist Party more seriously. 

"Too many U.S. companies have failed to take needed actions to address the threat posed by CCP policies," Conway writes in the official comment.

"Many continue to outsource production and research and development, undermining U.S. competitiveness and national security interests."

The bottom line: White House officials — and Biden himself — are always careful to emphasize that fighting inflation is primarily the responsibility of the Federal Reserve.

Scoop: Labor unions warn Biden not to lift China tariffs

The issue has divided Biden's top advisers.

Photo illustration of Joe Biden holding a Chinese flag. 

Photo illustration: Aïda Amer/Axios. Photo: Drew Angerer/Getty Images

Trump tariffs

China

President Biden has made the COVID-19 crisis and a post-Trump return to national unity and traditional democratic ideals his top priorities. From vaccinations to stimulus to schools, Biden is seeking bipartisan compromise while showing a willingness to use executive authority and bare Democratic majorities in the U.S. House and Senate to implement his policies. Republican leaders are navigating deep party divisions over if and how to move beyond former President Trump.

Politics & Policy

China is becoming the most formidable rival America has faced, and the risk of confrontation with Russia, North Korea or Iran still looms. Authoritarians are rising, the chaotic Afghanistan exit revealed the limits of U.S. power, and the pandemic, climate change and other critical challenges continue to pose grave threats.

World

President Biden is putting Asian economies at the center of a new economic accord, at a time when globalization has become anathema, and geopolitical tensions are reshaping the world order.

Why it matters: Regional heavyweights like India, Australia, Japan, and South Korea are linchpins in the Indo-Pacific Economic Framework (IPEF), which (at least for now) has pointedly excluded China.

The administration is seeking new regional alliances and fortifying old ones, but those ambitions face an uphill climb.

By the numbers: Two-way trade between the U.S. and the region totaled $1.75 trillion in 2020, according to White House estimates, with American foreign direct investment just shy of $1 trillion.

The other side: According to the Center for Strategic International Studies (CSIS), some constituents are worried about the “optics” of not including Beijing.

Even worse, “partners in the region remain perplexed over what the IPEF is and what it seeks to do,” the CSIS wrote in a recent analysis.

The big picture: The bilateral U.S-China relationship is tense for a number of reasons, with grievances over trade and technology topping the list.

The new framework is designed in part to cultivate new allies, and counterbalance China, but it's already coming under bipartisan fire for being insufficiently clear or ambitious.

What they’re saying: Trade isn’t just about the flow of goods and services anymore. In a global economy increasingly reliant on advanced technology, Biden has an opportunity to craft rules “based on safety, security, and transparency, argues IBM vice chair Gary Cohn.

In an opinion piece shared with Axios, the ex-Goldman Sachs banker turned White House economist called the framework “a good start” that needs more muscle – and  a laser-focus on data security and intellectual property.

“Without the certainty of clear, legal obligations, countries will be free to ignore its elements on a whim as different governing constituencies come to power,” he added.

Yes, but: Some Asian economies are concerned efforts will only involve “the usual suspects” while excluding other key countries. 

“These partners view the success of the IPEF as hinging on the extent to which the United States can attract developing countries from Southeast Asia, South Asia, and the Pacific,” the CSIS said.

The bottom line: Asia is strategically critical, America needs all the friends in the region it can get, and many countries are committed in principle. But a flawed rollout may spoil the IPEF's chances before it even begins.

Biden's Indo-Pacific gambit puts trade back on the radar

Illustration of a globe of Asia and Africa plugged into the wall

Asia

Big Tech

Data privacy

From the Valley to D.C., Big Tech players like Facebook, Google and Amazon are under more scrutiny than ever as new technology develops and privacy and antitrust concerns grow in lockstep with companies’ ambitions.

Technology

Pro Rata

Axios Pro Rata

America's supply chain crisis, which has driven prices higher and made all sorts of goods harder to find, may last long after the holiday season.

The big picture: If goods aren't off a boat by now, it's highly unlikely that they'll make it onto store shelves before Christmas. And there are dozens and dozens of ships anchored offshore at the country's biggest ports.

Around 40% of U.S. container imports come through the Ports of Long Beach and Los Angeles, but they aren't operating at full capacity.

Details: During an "Axios on HBO" visit last Tuesday morning, at least half of the visible terminal cranes were standing upright, which means they weren't removing containers from ships.  The problems are legion and interconnected.

U.S. consumers are buying more goods than ever before, thus increasing the number of arriving containers. 

There aren't enough trucks to remove all of the containers from the yards, which means cranes are forced to stop removing containers from ships. 

And all of this is exacerbated by a labor shortage, including both truckers and terminal mechanics, overstuffed warehouses, and an antiquated system that requires trucks to pick up a specific container within a specific time window (despite L.A. freeway traffic).

What happens next: Some consumer demand may wane after the holidays, helping the ports begin to catch up, but there are three more major trouble spots on the horizon:

1. The labor contract representing around 15,000 West Coast port workers expires next summer. 

This could be a very difficult negotiation, given the reinvigorated U.S. labor movement and the fact that freight shippers are generating massive profits — charging top dollar to desperate importers. 

Prior negotiations, in 2014, resulted in port shutdowns. It was bad then, but would be worse this time given the existing backups. 

2. The International Maritime Organization, which oversees global ocean freight, has been implementing new rules whereby ships must reduce their carbon footprints (which contribute around 2.5% of global emissions).

Some new technologies and fuels have been developed, but ships most commonly meet these goals by slowing down. 

3. There could be a reverse logjam next year in Asia.

Normally, a cargo ship would unload in Long Beach and then get filled back up with empty containers before returning to Asia. 

Today, however, the same problems plaguing ship unloading also applies to re-loading. Too little yard space, too few trucks, chasses, etc. The result is that some ships are leaving without enough empties, which could eventually impact the amount of cargo that's able to leave Asia for U.S. ports.

The bottom line: Time alone won't solve the supply chain crisis. 

Everything Shortage to last past Christmas

If it's not off a boat by now, it won't be on a shelf by Christmas.

Illustration of shipping containers arranged like a bar graph.

Axios on HBO

U.S. Trade Representative Katherine Tai will declare Monday that an extensive review found China isn't meeting its commitments under the Phase One trade deal — laying the groundwork for the Biden administration to keep in place Trump-era tariffs while considering other punitive actions.

Why it matters: American businesses and importers have waited months to hear what President Biden will do with the trade war he inherited from Trump, which has pitted the world's two largest economies against one another. 

Biden on the campaign trail criticized Trump's trade strategy.

But since taking office in January, he's maintained tariffs on billions of dollars worth of goods as his administration conducted its months-long, "top-to-bottom" review of U.S. trade policy toward China.

Driving the news: Tai will detail the review's findings in a speech at a Washington think tank Monday, marking her most extensive comments to date about the administration's plans to address China's "coercive" and "predatory" trade practices, according to officials who spoke to reporters on condition of anonymity to preview the remarks.

One senior official emphasized that Biden's strategy "is not to escalate trade tensions with China or double down on the previous administration’s flawed strategy."

Tai will highlight the history of China's trade abuses, beginning with its accession into the World Trade Organization in 2001, and "acknowledge that we need a new strategy ... that aligns with the priorities of our workers and businesses."

Details: The review concluded that the Phase One trade deal signed under Trump failed to address fundamental concerns over issues like China's IP theft and support for state-owned enterprises — but it did benefit certain American business sectors, such as agriculture.

Tai will confront her Chinese counterpart on areas where the U.S. says Beijing has failed to comply with the terms of the agreement, such as its commitment to buy an additional $200 billion worth of U.S. goods over two years.

That outreach will initiate an enforcement mechanism that could lead to more tariffs, a second administration official said: "All tools are on the table. All options are available for us to consider what we need to do to defend our interests."

Between the lines: Though existing tariffs on more than $350 billion worth of Chinese goods will remain in place as these talks play out, the administration will launch a "targeted exclusion process" to allow certain businesses to apply for exemptions.

Exemptions will take into account domestic priorities, such as securing U.S. supply chains and increasing America's competitiveness in key sectors.

What's next: Biden is seeking to craft a broader China trade strategy that extends beyond tariffs, incorporating coordinated approaches with U.S. allies and goals of major domestic investments via his multitrillion-dollar "Build Back Better" agenda.

The bottom line: The administration does not expect China to meaningfully change its practices and is not seeking to open negotiations on a Phase Two agreement with Beijing.

"We recognize that China simply may not change, and that we have to have a strategy that deals with China as it is, rather than as we might wish it to be," an official said.

U.S. to warn China is not complying with Trump's Phase One trade deal

The administration has concluded a months-long review of Trump's China trade policy.

Shipping containers at Nansha Port in Guangzhou, China. Photo: Qian Wenpan/Nanfang Daily/VCG via Getty Images

U.S. China trade war

The Biden administration will "build on" existing tariffs on billions of dollars of Chinese imports as part of a strategy against the Chinese government for failing to meet commitments under the Trump-era Phase One deal, U.S. Trade Representative Katherine Tai said in an interview with Politico on Thursday.

Why it matters: Tai's comments come as the Biden administration seeks a new trade strategy with Beijing while navigating U.S. companies' calls to lift tariffs.

China is behind on its commitment to purchase an additional $200 billion in U.S. goods, according to Politico.

With the Phase One deal signed by former President Trump set to expire at the end of 2021, the Biden administration will need to decide whether to renegotiate or move in a different direction, Politico notes.

What she's saying: Trump's tariffs "had the effect of getting a lot of people's attention," Tai told Politico.

She added that they are a "tool for creating the kind of effective policies, and [are] something for us to build on and to use in terms of defending to the hilt the interests of the American economy, the American worker and American businesses and our farmers, too."

"I think it's going to be important to review China's performance with China, and that's going to be the critical first step in my mind," Tai said.

The U.S.'s relationship with the European Union will be key to their strategy, she added. 

"I do think that there is every reason for us, because of our shared interests, to build on the relationship between us," Tai told Politico. "For itself, because it is inherently valuable, but also to build on that relationship on a collaborative basis for taking on the challenges that we are both experiencing."

The big picture: Tai was confirmed in March and had promised that she "will not hesitate to make use of the agreement’s mechanisms when China falls short of its commitments."

What to watch: Tai will deliver a speech Monday on the U.S.-China trade relationship at the Center for Strategic and International Studies in Washington, per Politico.

Go deeper: Trump's U.S.-China transformation

Editors' note: The headline and lede have been edited to clarify Tai's comment that she would "build on" existing tariffs. 

U.S. trade chief: Biden team will "build on" Trump-era tariffs against China

The tariffs are "something for us to build on ... in terms of defending to the hilt the interests of the American economy."

Photo of Katherine Tai in a dark navy blue blazer looking up to her right

U.S. Trade Representative Katherine Tai at a Senate Finance Committee hearing in May. Photo: Pete Marovich/The New York Times/Bloomberg via Getty Images

Data: U.S. Bureau of Economic Analysis; Chart: Axios Visuals

The U.S. current account deficit, the difference between what goods, services and investments Americans are buying from other countries versus what they are selling, jumped to $188.5 billion in the fourth quarter.

Why it matters: That was the largest shortfall since 2007.

Keeping score: Former President Trump cited the large U.S. current account deficit as a primary justification for the trade war with China.

Trump more than doubled the U.S. current account deficit

President Trump used the U.S. current account deficit to justify his trade war with China.

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