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How to Operate in a Strong Dollar Environment

Posted By John Min, PhD, Wednesday, April 22, 2015
Updated: Monday, April 20, 2015
As a leading international payments company with operations in major financial centers around the world, World First works with tens of thousands of importers and exporters to help them transfer funds across currencies. Therefore, we are acutely aware of how a surging US dollar has significantly affected many of our clients’ top and bottom lines.

 

As a quick market overview, Continental Europe and Japan have been mired in a disinflationary stagnation since last year.  This has resulted in tight credit, low investment, and weak consumer spending.  In contrast, robust consumer spending and improving labor markets in the US and UK have allowed those economies to expand and recover the losses incurred during the 2007-8 recession.

 

This divergence has rallied the US dollar relative to a basket of foreign currencies by 18 percent since July, and as a consequence, reduced exporters’ overseas earnings while decreasing the cost of imports.

 

$ INDEX (NYBOT:DX) Futopt Chart

 

 

Looking forward, the World Bank forecast the US economy to grow 3.2 percent this year.  In comparison, the Eurozone and Japan are forecast to grow 1.1 percent and 1.2 percent, respectively.  A stronger economy and higher US interest rates will continue to support the dollar rally this year.  As consequence, QuERIDATA, a leading global industry forecasting firm, projects the US market demand for Reconstituted Wood Products (NAICS6: 321219.1) in real or price-adjusted terms will grow 3.0 percent this year.

 

Market Demand measures production plus imports less exports.

 

 

Meanwhile, a strong dollar is expected to put downward pressure on export volume of Reconstituted Wood Products.  QuERIDATA forecasts the real export growth rate to decline by -6.8 percent this year and another decline of -1.6 percent in 2016.

 

 

In contrast, the import volume of Reconstituted Wood Products is forecasted to grow by 1.6 percent this year on the back of a recovering economy.

 

 

Against this backdrop, it is important for importers and exporters to factor in currency trends in their planning and budgeting processes and keep a close eye on market movements to mitigate potential negative effects of sharp currency movements this year.    

 

One simple way to achieve this is by taking advantage of no-cost forward contracts. With a forward contract, an importer or exporter can lock in a rate for specified amount of funds when the exchange rate is favorable with their bank or payments company and make the transfer when it is due on a future date - usually up to one year in advance.  This way, any unexpected currency movements will not affect the budgeted revenue or costs and help eliminate a potential budgetary headache this year.

 

John Min is the Chief Economist at World First USA.  To learn more about World First, please visit them here.

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