How American Businesses Are Suffering from a Strong Dollar

A strong dollar is ideal for businesses that import products or parts and a strong dollar is good for the international traveler. However, the negative impact on US companies that do business internationally or have international customers cannot be ignored. And in the event of a looming global recession in 2022, it will be like a 1-2 punch for US-based companies operating on foreign soil.

Many American companies have international customers

The American company that sells its products to an international consumer is struggling to secure the sale because a strong US dollar is likely to make things unaffordable overseas. The international consumer is paid in the local currency of their country of origin and the exchange rate to convert to US dollars becomes too expensive. It’s a challenge for the US company to stay competitive against local alternatives as the US dollar continues to strengthen.

How does the US dollar continue to strengthen?

One of the reasons for this additional strength is that we are seeing rising interest rates. The higher rates encourage foreign investors to hold their money in US dollars, which increases demand for the currency, thus strengthening the dollar. Foreign exchange markets are constantly changing.

More expensive exports for US companies

When US companies export their products to other countries, purchasing power is weakened by a strong US dollar. The affordability of international sales declines and the result is a decline in demand for US exports. The international consumer will look for local alternatives, be hesitant to make the purchase, or be left out of the price altogether. The resulting drop in demand is fueled by reduced affordability with a stronger US dollar.

Servicing dollar-denominated debt becomes more costly

For businesses that need to convert to the US dollar to service their debt, the impact of a strong dollar can be a big deal. Suppose a company has borrowed money and is paying the interest in US dollars. When the US dollar appreciates by 10% against the currency in which they do business, the cost of servicing their debt is indeed 10% higher. Currency risk has a direct impact on the bottom line of many small and medium-sized businesses that operate in other currencies. The stronger US dollar is a problem for international companies that use dollar-denominated debt.

How do large companies insulate themselves from currency risk?

Large companies try to protect themselves against fluctuations by locking in exchange rates. The goal is to avoid unexpected increases in their liabilities or debt. The tool that is often used is a forward exchange contract, it is an agreement allowing a company to buy or sell a certain amount of foreign currency on a specific date in the future. This tool does not eliminate currency risk, but it does help a business manage risk.

There are specific investments that seek to find opportunities with currency risk management. Adjusting your investment portfolio to take into account currency fluctuations is not an easy task.

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