There are a number of geopolitical factors affecting business and foreign currency exchange volatility, including inflation, economic growth, interest rates, and international trade.
Inflationary pressures can cause a nation’s currency to lose value relative to other currencies, while economic growth can lead to appreciation. Interest rates also play a role, as higher rates tend to attract foreign investment and can lead to currency appreciation. International trade can impact currency values, too, as nations that export more than they import typically see their currencies appreciate more than those of their trading partners.
For businesses, currency exchange can have a serious impact. Organizations doing business abroad are constantly affected by changes in currency values. For example, let’s say a U.S. company is doing business in Europe. If the value of the dollar decreases against the euro, that company’s products will become more expensive for European customers, and they may start to look for cheaper alternatives. This can seriously hurt the U.S company’s bottom line.
Similarly, a U.S. company that imports goods from Europe will benefit from a weak USD/EUR exchange rate. The company will be able to buy more goods for the same amount of money, which could lead to increased profits. Of course, if the U.S. dollar weakens, it could start to hurt the company by making its products too expensive for consumers.
So much more than supply and demand
A wide range of factors — including the value of a company’s local currency, the relative price of foreign imports and exports, and the cost of paying foreign employees — impacts a company’s bottom line. For multinational business finance, this volatility can crop up on a much larger scale.
Companies have to be aware that the forces that drive exchange rates are far more complex than simple market demand and supply. For example, a company may decide to source items from a foreign producer because it’s cheaper than producing the same item at home. However, if the value of each country’s currency varies against one another, the price difference may not remain constant. If the price of imports increases because of currency fluctuations in the importing country, then buying materials from a foreign country may no longer be viable. Alternatively, a company selling in foreign countries can be hit by currency swings when it converts its profits back into its home currency.
For instance, a U.S. company might contract with a factory in China to manufacture a product at a set cost in Chinese yuan. If the value of the yuan increases compared to USD, but the manufacturing cost in China stays the same, the manufacturing cost for the U.S. company will increase.
How to manage currency volatility when it happens
This rapidly changing currency exchange market will inevitably impact how and when U.S. businesses invest or expand to other countries. If your business is operating in countries with currency exchange volatility, you’ll need smart strategies to come out ahead. Here are a few to consider:
1. Ensure your access to exchange rates
#The biggest advantage businesses can give themselves is to ensure they have access to fair and transparent foreign exchange rates. These rates differ depending on the overall volume of payments, size of payments, currency pairs, hedging requirements, and speed. There are several technology-forward payment options on the market today that offer competitive pricing. For optimal access to the best rates, companies should choose a payment option that offers up-front pricing.
2. Focus on payment volume
Remember, the price of international transactions varies significantly between countries. For example, the rate of sending money from the U.S. to the United Kingdom is much different from the rate of sending money from the U.S. to Vietnam or other developing markets. Transactions to developed countries have more liquidity and are commodity-driven, while payments to less-developed countries are much lower in volume and highly localized. With this in mind, it is in your best interest to talk with your provider about your overall business goals and payment volume rather than focusing only on individual currency pairs.
3. Find fair payment solutions
One of the best opportunities for small businesses is to find a payment solution offering fair pricing on foreign exchange to ensure that when you send and receive money, you don’t lose any. It benefits you as a business owner to have a high level of control over the payment process. This will allow you to hold funds until the exchange rates are favorable, lock in rates for the future, and have the flexibility to have the payment sent and requested in local currency.
Since currency exchange rates can have such a significant impact on businesses that operate in multiple countries, it’s important for leaders to be aware of these risks and take them into account when making decisions about where to invest and how to price their goods and services. In this way, they can more nimbly adapt to today’s markets.
DISCLAIMER: This article was written by a third party contributor and does not reflect the opinion of Born2Invest, its management, staff or its associates. Please review our disclaimer for more information.
This article may include forward-looking statements. These forward-looking statements generally are identified by the words “believe,” “project,” “estimate,” “become,” “plan,” “will,” and similar expressions. These forward-looking statements involve known and unknown risks as well as uncertainties, including those discussed in the following cautionary statements and elsewhere in this article and on this site. Although the Company may believe that its expectations are based on reasonable assumptions, the actual results that the Company may achieve may differ materially from any forward-looking statements, which reflect the opinions of the management of the Company only as of the date hereof. Additionally, please make sure to read these important disclosures.
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