Insight to All Things Currency and Treasury Management

FiREapps’ CEO Wolfgang Koester was on CNBC this week answering questions about the impact of a strengthening dollar on U.S. and European multinationals, whether a dollar correction is on the horizon, and how a currency surprise from China could shock the market. What’s the solution? A currency analytics platform helps corporations manage the risk associated with currency volatility, both organically and through hedging. Read an edited version of the conversation and watch the video below.

CNBC: How does a stronger dollar impact U.S. multinationals?

Wolfgang Koester: Many of the big U.S. multinationals get significant percentages of their revenue from abroad. A U.S.-based multinational might have 85-90 percent of their revenues outside of the U.S. What a strong dollar means for those companies – and for their investors – is decreased revenue. I’ve described it before as ‘dollar up, revenue down’ because if you have euro income, for example, you’re going to get fewer dollars for those euros. That impacts companies from the top line all the way to the bottom line of the income statement.

CNBC: Is this just a translation issue or is it actually something that derails growth for the nation when we see the dollar rise?

Wolfgang Koester: The impact from currency volatility is not just accounting risk. It’s economic risk. From a revenue standpoint, the impact of a stronger dollar – for companies that aren’t managing it – is less cash. Maybe the company used to get $1.50 per euro and now gets $1.25 per euro. That’s 17 percent less cash on the income statement. So then the question for multinational corporations becomes, ‘What am I doing to protect against that erosion of revenue?’ This is the question CEOs and CFOs are asking.

And it’s not only U.S. multinational corporations. A stronger dollar impacts European multinationals as well, when they have costs in U.S. dollars – now their costs have risen. So now we see European companies asking how they mitigate the risk of a stronger dollar, and some are actually strategically deciding to manufacture more in the U.S. to mitigate that risk. That plays right into President-elect Trump’s strategy of bringing more manufacturing jobs to the U.S.

CNBC: The dollar has strengthened so far, so fast already – do you think it’s possible we’ll see a correction?

Wolfgang Koester: I don’t think so, because I think we’ll also have rising interest rates moving forward. That’s not a concern I’m hearing from CEOs and CFOs.

A concern I’ve been talking about for a couple of years now, and one I’m hearing corporate executives talk about now, is the Chinese yuan. Over the last two years the yuan has depreciated more than 12 percent relative to the U.S. dollar. That surprises many people, who think of the Chinese yuan as being very tightly pegged to the U.S. dollar. That used to be the case, but China has been widening the trading band – slowly unpegging the yuan from the dollar and depreciating the yuan.

I see that continuing to happen, and the pace of it increasing, which will be a shock to the market. I expect to see massive volatility coming from China. Corporations doing business in yuan will very quickly have to get comfortable managing yuan risk; historically it hasn’t been a risk that many companies manage, but CEOs and CFOs – and their investors – need to pay attention to it now.

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