Managing Exchange-Rate Volatility: It's Hard, and Getting Even Harder
No American exporter to Europe wants to hear that exchange rates are going to be a renewed headache. But with the euro plunging, then recovering, the reality is that they are -- a volatile, messy headache.
Simplistic views of exchange rates -- often fed by a hyperventilating press -- suggest that when a currency goes down, a country's exporters benefit. And when it rises, they lose out. The reality is much more complicated. Globally active companies often find that a rise here balances out a fall there. If manufacturers import components for assembly and re-export, then they get help on the purchasing side. And various financial strategies can mitigate the effect of currency swings.
Still, the hardest thing to do right now will be to plan for your business. That may be one reason why Dieter Zetsche, the chief executive of Daimler, recently commented that the upside from a falling euro does not leave him wanting more:
A weaker euro in the short term is an opportunity. While we would be benefiting in the short term from some pressure on the euro, we would not be wishing for that.Europe is still getting its arms around the debt crisis it faces. Greece, Spain, Portugal and Italy need to get their fiscal houses in order. European leaders may not get there at all, though my hunch is they will. Still, Europe-level decision-making is typically full of fits and starts, of half-measures followed by half-implementation. Democracy in action. So news that drives the euro up and down, the dollar up and down, could very well be the norm for awhile.
So, if you're managing your company's currency exposure, beware. Currency hedging by smaller companies has helped them avoid losses in a manner once reserved for the big guys. But options contracts are hard to figure out if the medium-term trend of a currency is unclear, and can sometimes cost you money instead. The volatility that we've seen could very well get worse before it gets better.
If you export to Europe, recall that the euro started out in 1999 at a rate of one to $1.17. So, assuming no vast changes in productivity differentials between the United States and Europe since then (a fair bet), it still looks overvalued right now. It could go down further.
Think about how your competitors will react to the dollar-euro swings at the microeconomic level. A German company that draws all its components from companies that also use the euro may very well have a leg up. But the Germans, who often compete directly with American companies making capital equipment, have embraced outsourcing with a vengeance, including from the U.S. and China, which links its currency to the dollar. Is there an automatic advantage here? Absolutely not. It depends very much on the business you are in.
The world is complicated. So are currencies.
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