The Decline of the Dollar-Then and Now
When
it comes to foreign exchange, the more things change, the more they
remain the same. Today, the dollar is weakening dramatically.
Volatility is high. European and Asian companies are struggling to
manage the negative impacts of the strength of their currencies
compared to USD. Meanwhile, Europeans vacationers are coming in hordes
to cash in on their newfound buying power. U.S. interest rates are
easing. Gold is trading around $800. The British Pound is trading above
2.05 to the USD. US firms are asking themselves whether they should be
hedging. Regulatory bodies are talking about changing disclosure
requirements. All of these things are as true today as they were back
in 1980!
Of
course, after 1980, things changed. The dollar regained its strength
and companies on both sides of the Atlantic (and the Pacific) were
forced to react to new market realities. Many stakeholders who took
their eyes off the fundamentals in the late 1970s were unprepared for
changes in the early 80s that led to serious economic consequences.
Then, as today, the dollar's weakness had obscured some underlying
problems.
The Shape of Things to Come?
Looking
at economic history in terms of seven-year cycles, we can examine the
events after the rebound of the dollar in 1980 for signs of things to
come in 2008, just four cycles later. In 1980, economic impacts drove
regulatory bodies to do what they always do after a crisis in
confidence: increase scrutiny on stakeholders. This led to the
introduction of FAS 52 in 1981 and increased disclosure requirements.
If current trends follow suit, a rise in the dollar will be marked by
economic losses and financial restatements by U.S. multinationals,
followed by another round of regulations and stakeholder scrutiny.
There
are many recent examples of industry-leading, European and Asian
multinational companies that have suffered material losses due to the
strength of their currencies relative to the U.S. dollar-SAP, Reuters,
Lufthansa, and Cannon, among them. FX-related corporate losses for
U.S. multinationals will be triggered by a sharp - even if not
sustained - dollar strengthening. Some of these companies will face
serious consequences, revealing themselves as the "Enrons of FX". The
dollar's turn-around will trigger sudden, unexpected financial results
that will have a domino effect on corporate value. Economic surprises
will lead to further scrutiny by stakeholders. This will trigger
compliance questions with dramatic negative impacts like those
experienced by Allied Defense.
Today,
European and Asian companies have been forced to ask themselves, "How
do we more accurately identify and quantify currency exposures?" and
"How do we communicate this to stakeholders, so they are not surprised?"
Better Data and Automated Processes Lead to Predictable Results
All
companies that generate revenue or incur costs in foreign currencies
can suffer from foreign exchange volatility. But for companies with
inadequate or non-existent exposure management policies, the fallout
can seriously impact the bottom line, jeopardizing share prices for
public entities, or the prospect of a successful IPO for start-ups.
From
one perspective, the risk of currency fluctuations is one of the easier
financial risks to manage. Exchange-traded options, currency swaps or
forward contracts can all lock in exchange rates to protect cash flows
from the effects of currency swings. But before these kinds of hedging
strategies can help, companies need to understand and accurately
quantify their exposure so they know where-and why- they are vulnerable.
The
Chief Finance Officer who seeks greater involvement in the definition
of currency risk management policies, and endorses a holistic,
collaborative approach to the problem can set his or her organization
on the right path to getting their accounting and compliance right, so
they can focus on optimal economic decisions. The automation of these
processes increases efficiency, reduces errors and supports the kind of
cross-functional collaboration needed to ensure that foreign exchange
exposure management becomes a economic strategy, rather than an
unanticipated consequence of uncoordinated activities.
Wolfgang Koester, FiREapps
To Discuss this Blog in the Forum Please Click Here
