Navigating Global Risk: How US Companies Can Tackle Currency Volatility

Currency volatility is a fact of life for any business seeking to trade across national boundaries. In fact, given the interconnected nature of the modern global economy, it’s something that even smaller, local businesses have to consider.

When one currency suddenly collapses, and another soars, it can cause margins to quickly narrow, and ventures that were once viable to suddenly become loss-making.

So, what can be done to deal with this?

What Currency Volatility Means for US Businesses

Let’s think about the two sides of the volatility coin. What happens if you’re selling in a foreign market, and the dollar soars? You might find that you’re suddenly priced out by your overseas competitors, whose costs are being measured in other currencies. On the other hand, if you’re bringing in supplies from overseas, a weaker dollar might inflate your cost of production.

Volatility can also affect the way that your revenue is reported and taxed. If you’re contractually obliged to sell at a given rate, then you might find that swings in the dollar are difficult to react to.

Common Pitfalls When Operating Internationally

It isn’t just the price of the dollar that international businesses need to attend to, but the other considerations that come from operating in foreign markets. You might find yourself navigating a world of regulations, tax laws, and intellectual property rights that you don’t fully understand. There are also cultural differences to contend with, and local quirks that defy easy categorization.

All of these things can compound your struggles when dealing with volatile currencies.

Strategic Solutions: From Pricing Models to Treasury Policies

So, what can businesses actually do to limit their exposure to currency fluctuations? There are a number of measures to consider.

To begin with, you might treat foreign suppliers and customers effectively like they’re domestic ones, by billing them in dollars. This, however, might create additional work for them, which will bring down your takings overall.

Then there are forward contracts, which effectively see both parties agree to a certain rate of exchange for a certain amount of time. This will effectively fix the price of the dollar, allowing you to plan for the future. Provided that the rate agreed in the contract is reasonable, it can be a powerful means of lowering risk.

The Role of Forex Hedging in Safeguarding Margins

Forex hedging is among the more sophisticated risk-management strategies. It involves betting against the currency you’re dealing with. So, for example, if your business stands to be crippled by a collapse in the dollar, you might hedge against it, and thereby protect your earnings.

Doing this effectively often means consulting with the right advisors, and using the rights tools. Fortunately, modern businesses have access to an unprecedented suite of these tools – and learning to wield them effectively can help protect your business from disaster!