How U.S. Companies Suffer From A Strong Dollar

A strong dollar is great for businesses that import products or parts and a strong dollar is good for the international traveler. However, the negative impact on U.S. companies that do business internationally or have international customers, cannot be discounted. And in the case of a pending 2022 global recession, it’s going to be like a 1-2 punch for U.S. based firms operating on foreign soil.

Many U.S. businesses have international customers

The U.S. business that sells its products to an international consumer is finding it difficult to get the sale because a strong U.S. dollar stands to make things unaffordable abroad. The international consumer is paid in their home county’s local currency and the exchange rate to convert to U.S. dollars is getting too expensive. It is a challenge for the U.S. business to remain competitive against local alternatives when the U.S. dollar continues to strengthen.

How does the U.S. dollar keep getting stronger?

One reason for the additional strength is that we are seeing an increase in interest rates. The higher rates attract foriegn investors to hold their money in U.S. dollars and this drives up the demand for the currency, thus strengthening the dollar. Foriegn exchange markets are always changing.

More expensive exports for U.S. companies

When U.S. companies export their products to other countries the purchasing power is weakened by a strong U.S. dollar. The affordability for international sales declines and the result is lower demand for U.S. exports. The international consumer will seek local alternatives, hold off on making the purchase or gets priced out entirely. The resulting decrease in demand is fueled by the reduced affordability with a stronger U.S. dollar.

Servicing dollar denominated debt becomes more costly

For companies that have to convert to U.S. dollars to service their debt, the impact of a strong dollar can be a big problem. Let’s assume a business has borrowed money and pays the interest in U.S. dollars. When the US dollar strengthens by 10% against the currency in which they do business, the cost to service their debt is in effect 10% more expensive. The currency risk directly impacts the bottom line for many small and medium sized businesses that operate in other currencies. The stronger U.S. dollar is an issue for international businesses that use dollar denominated debt.

How do large businesses insulate themselves from currency risk?

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

There are specific investments that seek to find opportunities with managing currency risk. Adjusting your investment portfolio in a way that helps account for currency movements is no easy feat.

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