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Burberry Expects Currency Fluctuations to Take Bite Out of Profits

Burberry Group, a UK-based luxury clothing company, announced that it expects its profits to be hurt by currency fluctuations.

The retailer’s revenue for the six months that ended March 31 leapt an impressive 19 percent year-on-year to $2.2 billion. While store traffic continued to lag below expectations, online sales were robust.

However, Burberry cautioned that its increase in revenue could be countered by the “material adverse impact” of currency exchange rates. CEO Angela Ahrendts said, “While current exchange rates are a material headwind in what remains an uncertain macro environment, our continued global brand momentum provides an excellent foundation for the future.” The rising value of the British pound increases the costs of conversion, chipping away at profits.

In general, the apparel industry has weathered a tough year from the perspective of foreign currency, stung by the rapid appreciation of the Chinese renminbi, the strengthening of the Pakistani rupee and the global problem of currency manipulation. A new study issued by the Economic Policy Institute urges the U.S. government to take a strong stand against international currency manipulation, arguing that its effects cost the textile an apparel industry millions of jobs.

Besides China, the study also cites Taiwan, Malaysia, Switzerland, Singapore, Norway, Saudi Arabia and Qatar but none of these rival the reverberations of China’s monetary practices. “However, China dwarfs all other currency manipulators in terms of its total global current-account surplus, and total FX holdings, due in part to the size of its economy. Among all currency manipulators, China had the largest 2012 current-account surplus ($191 billion), as estimated by the IMF. Furthermore, trade data from the United Nations Comtrade program suggest that China has been substantially underreporting its trade and current-account surpluses for at least the last six years.”

Some experts are worried that the depreciation of the yuan could have a contagion effect, infecting the Taiwanese dollar, Japanese yen and Korean won. In a recent note issued by Barclays Bank, analysts surmised this could be possible if the depreciation continues. “If we are looking at the beginning of some competitive depreciation – aimed at supporting exports and growth – the contagion implications are greater. In such a scenario, we would expect investors to turn more defensive on regional currencies on expectations that policymakers elsewhere could adjust their currency strategy,” the report said.