Dealing With a Strong U.S. Dollar

The U.S. dollar has never been so popular. It is currently more valuable than it’s been in the last six years prompting many industry experts to declare 2015 “The year of the dollar.”

Between improving economic activities and the much improved U.S. labor market, the Federal Reserve is talking about increasing overnight interest rates for the first time in six years. And many of the aforementioned indU.S. try experts are anticipating that the Fed will increase interest rates as early as June 2015.

The U.S. , it appears, is emerging from the darkness since the financial crash of 2007-2008.

In contrast the European and Asian economies are struggling with slow growth and low prices. I believe it will take them a little longer to catch up with the U.S. economy and as a result we could see the dollar retain its popularity into 2016.

What makes me say that?

  • USD is expected to climb even higher in the coming months, especially if the Fed pushes up the overnight lending rate from 0.25% to 1% by the end of the year. 
  • EUR is forecast to remain under pressure. The European Central Bank launched a €60 billion a month bond buying program in March in the hope of reversing falling prices and encouraging people to get out and spend their money. 
  • GBP has fared well against the U.S. dollar, but most analysts expect the US D will pull ahead. My read is that the market is betting that the Fed will raise the interest rate before the Bank of England, which translates to the U.S. economy getting better faster. There is also the choppy waters of their General Election to navigate in May.

So what impact does this have for if you’re selling on online marketplaces?

Well in straightforward terms, if you’re selling on mainland European marketplaces, 12 months ago 100,000 euros of earnings fetched roughly $140,000. Today the same euro earnings would fetch $35,000 less, or $105,000.

What can you do to mitigate currency risk in market conditions like this?

Online sellers could look to managing the risk posed by the strong dollar by considering a forward contract. A forward contract allows you to lock in an exchange rate for a future dated transaction. By way of example; Seller A knows they’ll have 250,000 euros to bring back to the U.S. in six months’ time. They can lock in an exchange rate now for the future date and know how many dollars will arrive, allowing them to focus on running their business and budget more effectively.

John Min is Chief Economist at World First U.S. A, Inc. To find out more about their services for online sellers visit their website.

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