Growing Your Global Business with a Strong Dollar
Take control of the currency risks associated with growing your franchise across borders.
By Matthew Lewis
You have worked hard to build the brand of your franchise and have reached the point where your business has expanded beyond U.S. borders to go global. You have done your research, established your presence in target foreign markets, business has been strong, and sales in your new markets are growing. Everything was looking great until you realized that the financial returns from your international units had gone stagnant or possibly even shrunk.
Dollar Strength Not Seen in Over a Decade
A likely culprit of recent diminished returns you may have seen has been the recent strength of the U.S. dollar. After a prolonged period of relatively subdued movements in the global currency market, the dollar broke loose in the second half of 2014 on the back of America’s improving economic outlook compared with most of the rest of the world. The dollar dominated, appreciating 12 percent for the year on a trade-weighted basis to turn in its best year since 1997. This rapid rise by the dollar could turn double-digit local sales growth by your global locations into negative returns when translated into U.S. dollars.
While still falling short of previous boom-periods, the U.S. economy has continued to gain strength, creating expectations in the market that the Federal Reserve is likely to boost interest rates sooner rather than later. But it is not just the U.S. economy. We have seen prolonged weakness in the euro zone, Japan, Canada and elsewhere such that central banks abroad have had to step up stimulus efforts and further cut interest rates. This has created increased demand for U.S. currency, fueling the rise of the dollar.
The euro tumbled to a 12-year low against the U.S. dollar earlier this year on the heels of double-digit unemployment and the region’s inflation rate falling below zero, taking it to the point that the European Central Bank has been thrust into action to provide low rate stimulus policies. This is just one of the key factors that have caused many investors to leave Europe and head for higher yields in the States, significantly eroding the value of the single currency.
The dollar continued to build on its broad gains over the first couple of months of 2015 before leveling off and retreating somewhat in response to more tepid U.S. economic data releases through the spring. The mixed performance of the economy and dollar volatility has the market wondering if an encore of the dollar’s strong performance in the latter part of 2014 is in the cards for the second half of this year.
At the same time, when the strong dollar has largely damaged the value of sales into foreign markets, it has conversely been a boon for those who are making purchases from foreign vendors or otherwise making payments to foreign beneficiaries in their local currencies. No matter how the dollar fares for the remainder of this year, its value is sure to have an impact on your global business.
Take Action to Manage Your Foreign Currency Risk
The global currency markets are subject to a wide variety of economic and geopolitical influences. Even Mother Nature can add to the unpredictable nature of the market. So how do you manage your exposure to currency movements in this environment of increased volatility and dollar strength? While it may seem daunting, implementing an effective currency strategy is within reach and can be achieved by following a few fundamental steps.
First, give yourself a full view of your global exposures. You can start small by examining your cross-border payment activity over the past three to six months and your expected payments coming up over the same period. It is important that you take inventory of both your incoming and outgoing payments, even if those transactions are executed in U.S. dollars without conversion to or from local currencies.
It is also important to understand that working in dollars does not remove you from currency risk but instead is a strategy in and of itself. Once you have listed your individual exposures you can then ask yourself a few simple questions such as:
- What is my balance of incoming and outgoing payments?
- In which countries and currencies do I have the most exposure?
- How predictable are my payments?
Once you have a view of your global payments you need to establish a budget exchange rate. For simplicity, many people simply use the current exchange rates for the applicable currencies as a baseline. By applying your budget exchange rates to your expected payments you can get a preliminary view of your expected foreign receipts and expenditures.
The next step is to calculate those same inflows and outflows if the rates moved 10 percent in either direction. Remember that when you are currently making and receiving payments in U.S. dollars, you are generally putting the risk and burden on your international partners and vendors. If the dollar moves significantly against them then they are likely to request or demand revised terms to account for the movements. By going through this exercise you will give yourself a basic risk profile upon which you can make more informed decisions.
Now that you have a better view of your risk profile, you need to set your business objectives. Do you have tolerance for currency movements that may go in your favor or against you, or do you need to prioritize stability and predictability – participation versus protection or a mix of both.
When you have determined your exposures and business goals, you have given yourself a foundation upon which you can build an effective global payments strategy. If your payment needs are less predictable and you have the ability to absorb the ups and downs of the market then you may wish to work primarily in the spot transaction market. If however your tolerance for movement is lower and you have a level of certainty in the timing and size of your payments, then you will likely want to utilize hedging tools like forwards or options to minimize your risk. Your global payment provider should have tools and resources to help you through this process and address your exposures.
Regardless of the strategy that you choose to implement, taking a proactive approach to managing your global payments will allow you to make more informed decisions and minimize the surprises which can be detrimental to your business. By taking the time to better understand the impact of currency movements you will also give yourself a more global view of your business which can help build your relationships with foreign partners and suppliers.
The bottom line is that having a clear and thought out plan for the management of your foreign currency exposures is a key piece of the puzzle as you work to maximize the success of your global business.
Matthew Lewis is Director, Partnerships & Alliances for Western Union Business Solutions, a division of The Western Union Company. Find him at fransocial.franchise.org.