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Weak Dollar Boosting US Profits

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The dollar's plunge might be preventing Americans from taking that European vacation this summer, but it could be the very thing saving their 401(k)s from buckling.

Some of the nation's biggest corporate powerhouses -- across all industries -- have used the greenback's retrenchment to shield themselves from slumping profit margins. Declines against world currencies make U.S. products look cheap overseas, and translate into big returns when sales are converted back into dollars.

Take Coca-Cola Inc. for example. Buying a can of Coke cost $1 in the United States, but the equivalent of about $2 in the U.K. -- one reason the beverage giant was able to sail past Wall Street profit projections earlier this week.

And they aren't alone: International Business Machines Corp., Google Inc., Caterpillar Inc., and eBay Inc. all rallied this week because of strong overseas profits.

"If you look at some of the companies that had good quarters, they're doing half or more business abroad," said Phil Orlando, chief equity market strategist at Federated Investors. "The weakness in the dollar is a significant benefit in currency translation, and for those companies that are developing products that will create a boost for export activity."

Orlando points out that economic growth in the U.S. will slow to about 1 percent during 2008 -- down from about a 4 percent last year. Economists believe growth is now at its worst rate since the 2001 recession, and don't expect things to pick up until the last half of the year.

By comparison, countries in Europe and along the Pacific Rim are showing robust growth. And many companies, like IBM, have even adjusted their strategy to focus more of the business in areas like China and Brazil to take advantage of the situation.

The dollar is down about 8 percent against the 15-nation euro, and has touched lows against the yen and Great British Pound. One reason for the slide is that the Federal Reserve continues to lower interest rates -- and that makes the dollar less valuable.

Atlanta-based Coca-Cola reported said revenue jumped 21 percent to $7.38 billion during the first quarter. It attributed 9 percent of the increase coming from the dollar's decline against other currencies.

President and Chief Operating Officer Muhtar Kent, who will become Coca-Cola's next CEO, told analysts that he plans to expand the company's overseas operations to help offset some of the sluggishness in its U.S. operations.

Google surprised Wall Street by delivering a 30 percent rise in profit to $1.31 billion, and marked the 12th quarter out of the 15 since the search engine went public that its performance has topped projections. Sales, excluding revenue passed on to partner sites, climbed 46 percent to $3.7 billion.

The company said that sales would have been about $202 million lower without business coming from overseas.

Meanwhile, Caterpillar said strong international sales of the company's bulldozers and other heavy construction equipment overcame weakness in North America. Sales grew by 30 percent outside of the U.S., and represented 58 percent of total revenue.

Some economists believe this boost to big companies' earnings won't last too long. Much of the dollar's recent slide is because interest rates have fallen since last year -- and there is speculation the Fed might soon signal an end to rate cuts.

The Fed has cut interest rates by three percentage points since mid-September -- and some economists project they will lower rates by a quarter-percentage point when it next meets on April 30, and hold it there until year end. Economists say the Fed may be worried that lower rates could exacerbate inflation already seen in rising food and fuel prices, and that would hurt everything from consumer spending to corporate earnings.

"There's a lot of strength in the global market, and that's been the ongoing story, but I think we're probably in the final stage of the dollar's decline," said Peter Cardillo, chief market economist for New York-based brokerage house Avalon Partners.

"If the dollar strengthens, it will only be to our benefit," he said. "We'll see money flow into the U.S. instead of exiting. And companies will then see sales shift."