Foreign exchange exposure of U.S. firms and macroeconomic conditions: is there a link?

Abstract

We examine the dynamics of foreign exchange exposure of U.S. firms to two currency indices: the major (MJ) currency index and the emerging markets (EM) currency index. We model the dynamics as a function of firm-specific variables and macro variables. We find that exposure to the two real currency indices is significant and significantly time-varying. Time variation in the exposure to the MJ index is mainly driven by the macro variables, while the time variation in the exposure to the EM index is driven by macro, as well as firm-specific variables. Also, the exposure to the EM index has increased over the recent period. The large impact of emerging market currencies on the returns of the U.S. firms underscores the important role that emerging markets play in the U.S. economy. We also uncover that overall the total exposure of U.S. firms to the two currency indices increase during economic contractions