Gone are the days when you only cared about another country’s currency when planning to visit. In our global economy, currency risks affect just about every business executive and investor.
After all, U.S.-based businesses export, borrow from multi-national or non-U.S. lenders, and operate in other countries – or at least do business with companies that are internationally connected. What happens to one country’s currency is no longer confined to that particular country.
Most recently, the European Union has been the biggest region to create currency risks as Greece and other euro zone members face financial instability. As J.P. Morgan reported late last year, if the euro zone breaks up, its member countries will face an economic depression, while countries elsewhere likely will experience a recession.
Currency risk is nothing new – China has long been devaluing its currency to encourage non-Chinese businesses to operate in the country, while Japan, South Korea, Taiwan, England, and Switzerland are just a few of the countries that have devalued their currencies to export themselves out of a slump over the years.
Identify and mitigate the risk
Recognize lenders may raise rates or be stricter in approving loans if their home country (or a country in which they’re heavily invested) is facing a downturn. In addition, fewer non-U.S. lenders or loans mean an overall tighter credit market for U.S. businesses.
Know where your customers, vendors, and suppliers are. If these companies are based in other countries, your business most likely will feel the effects of their currency fluctuations. Even if your business only operates domestically, you can still be impacted by fluctuations for raw materials that are priced in a foreign currency. However, you can hedge against the risk through several options, including locking the exchange rate in your agreement with them.
Monitor currency forecasts. Explore the effect and determine if you should lead (pay in advance) or lag (pay slower) in your payments to a company in a particular country where its currency is expected to fluctuate in the short term.
Embrace your global footprint. By identifying where your business could be affected by non-U.S. currency fluctuations, you can plan better for the risk as well as the opportunities. You also may want to consider seeking guidance from trusted advisors, who can help you create a plan and evaluate tools to minimize the impact of currency risk for your business.