Forecasting currency values is more difficult than ever. For example, the value of the U.S. dollar, which was predicted to decline quite some time ago, has appreciated against major currencies since the mid-90s. However, a recent decline in the dollar as compared to the euro is projected to continue, possibly establishing a new trend. How does this affect your business?

Many Factors Impact Currency Values

During the 1990s, foreign investment flowed into the United States at an unprecedented pace. The longest U.S. peacetime expansion on record, strong productivity gains, and a stock market with exceptional returns attracted capital from all corners of the globe. These factors indirectly resulted in a stronger dollar.

Plus, after the Asian crisis and uncertainty over the value of the euro, investment looking for a safe haven poured into the U.S. This drove the value of the dollar even higher.

Will the Euro Challenge the Dollar?

Over the past several years, investors repeatedly expected the single European currency to gain against the dollar. But, the euro entered each new year with high expectations that never materialized. However, following a smooth transition to euro notes and coins at the beginning of 2002, markets reacted positively. Months later, some analysts predicted the euro eventually would challenge the dollar for world dominance.

According to the Conference Board, a research organization, 60% of world trade is currently denominated in dollars. In the event that the greenback falls from first place, a position it’s held since usurping the British pound after World War I, more global business will be conducted in euros. But regardless of which currency is on top, more and more European companies will request that their suppliers conduct business in euros.

Currency Values Can Alter Trade Flows

When a currency becomes very weak or too strong in relation to other currencies, it tends to distort international competition. For example, as the U.S. dollar rose to exceptionally high levels, U.S. producers needed to increase productivity in order to remain internationally competitive. However, some producers were not able to do so; they watched their products lose marketshare both in the United States and abroad.

On the investment side, U.S. companies interested in purchasing European assets obtained more for their money. But, U.S. firms already invested in Europe generated smaller profits when converting their euros into dollars.

Impact of a Rising Current Account Deficit

Some economists believe the U.S. dollar is due for a correction. A weaker dollar would undoubtedly benefit U.S. exporters by making their products less expensive and thus, more competitive abroad. But a quickly depreciating dollar could have other ramifications.

According to Fred Bergsten of the Institute for International Economics, every 1% rise in the U.S. dollar’s trade-weighted value boosts the U.S. current account deficit by at least $10 billion. A rising current account deficit perceived as unsustainable could negatively affect confidence in the U.S. economy, and in turn, accelerate downward pressure on the dollar.

How Have Other Currencies Fared?

The average 1999 and 2001 U.S. exchange rate (rounded) for the Canadian dollar was $1.49 and $1.55; the British sterling, $1.62 and $1.44; and Japanese yen, $113.73 and $121.57, according to the U.S. Federal Reserve. Projecting the future value of these or other currencies is difficult due to a variety of factors both known and unknown at this time. As a result, it is essential to protect your company against adverse fluctuations.

About The Author John Manzella [Full Bio]

John Manzella, founder of the Manzella Report, is a world-recognized speaker, author of several books, and an international columnist on global business, trade policy, labor, and the latest economic trends. His valuable insight, analysis and strategic direction have been vital to many of the world's largest corporations, associations and universities preparing for the business, economic and political challenges ahead.




More Articles | Speaker Programs | Speaker Demo | Videos | Services