Will the value of the dollar continue to fall? Will China revalue the renminbi? Would a revaluation actually help Midwest manufacturers? What is the future course for the euro? How should you adjust your strategy to best hedge against currency fluctuations?
Experts from the business and academic communities addressed these and related issues during the "Currencies in Crisis: Managing Your Financial Risk" conference, held April 26, 2004. Nearly 70 Wisconsin business leaders learned about options for shaping business strategies amid volatile foreign currency fluctuations. Corporate examples of currency management styles, implementation of strategies, risk assessment, and benchmarking were complemented by current research and emerging trends. The event was organized and sponsored by the Center for World Affairs and the Global Economy (WAGE) and the Center for International Business Education and Research (CIBER).
UW-Madison Economics Professor Charles Engel addressed the causes of currency fluctuations, explaining that higher U.S. interest rates strengthen the dollar and lower rates weaken it. The same concept applies to foreign interest rates.
Catherine Mann, senior fellow at the Institute for International Economics in Washington, D.C., added that there are two contrasting views as to why the dollar has depreciated relative to some major currencies in recent months. According to the trade view, the dollar is depreciating because the trade deficit is too large. "It's like the credit card analogy: we're spending more than we're earning and we'll have to pay back the debt at some point," she said. The global wealth view, in contrast, would say the dollar has fallen due to foreign portfolio reasons. Mann explained that as U.S. assets have absorbed "too much" global wealth, foreign portfolios with "too high" a U.S. share see a need to diversify and rebalance. Engel said the final component to consider is expectations about future exchange rates, inflation, productivity and growth. "Expectations are determined by news about future monetary policy in the United States and abroad, but we can't predict the news," said Engel.
Businesses can employ strategies to minimize exchange-rate risk. Gregory Charlesworth, vice president - Foreign Exchange Services at Marshall & Ilsley (M&I) Bank in Milwaukee, described several tools, including two synthetic hedging tools. With a forward contract, companies attempt to reduce risk - not necessarily maximize profits - by contracting delivery of a specific amount of one currency for a specific amount of another on a fixed future date. The foreign exchange option is more flexible, but banks charge a premium price. Charlesworth also described a number of natural risk reduction tools, including borrowing local currency to offset the value of assets owned in a foreign currency, writing clauses into contracts that call for sharing of the currency gains or losses involved in a transaction and asking for price quotes in both U.S. dollars and the foreign currency.
Dennis Cooke, vice president of the Global MR Business at GE Medical Systems, said that his organization "likes to use forward contracts and options to protect against wildly fluctuating currencies." In contrast, Nancy Ballsrud, vice president and assistant treasurer for Cargill, Inc., said that Cargill - a privately held company with thin profit margins -"just can't afford to hedge." The company takes a "country risk triggers" approach, keeping a close watch on a country's key macroeconomic indicators and hedging only in certain situations. She added that the key is to have a risk mitigation plan in place before a crisis hits.
