The Turkish lira significantly dropped in value against the dollar this week amid trade tariffs against the country by the United States. Losing nearly 40 percent of its value against the dollar this year, this currency crisis has unsettled global markets – negatively impacting the South African rand and Indian rupee as a result – and hitting stocks in Europe and Asia.
Side Effects of the Lira Plunge
For multinationals doing business in any of the emerging markets, the fall of the lira and subsequent negative impacts to the rand and rupee can be cause for concern. As described by the New York Times, the lowered value of these currencies hurts the global economies in many ways:
1. Turkish buyers cannot buy as much from exporters in the developed world because their currency is not worth as much.
2. Multinationals should be able to import more Turkish goods for less money (hazelnuts, Turkish rugs, etc.).
3. In instances where businesses compete with Turkey in trade or as sellers, Turkish goods are effectively on sale, making organizations’ prices less competitive.
Without a move to raise interest rates in Turkey, it is possible that the currency could collapse.
Avoiding Impacts from Volatile Emerging Markets Currencies
Turkey has been an attractive emerging market – drawing in companies with stakes in factory machinery and consumer goods. And the recent economic headwinds have already taken its toll on some of those industries.
For organizations to avoid currency headwinds that negatively impact their bottom line, they need to have a full understanding of not only what their exposure to the lira is but also what their exposure to other emerging markets currencies. Often times, multinationals will have an understanding of what their exposures are to currencies they do the most business in, but it is smaller currencies that can have the biggest impacts if organizations are not protecting against them.
Did you know what your exposure to the lira, rand and rupee was when the currencies fell this week?
Do you know what your exposure to those currencies is now?
Are you confident in your hedge ratios to protect against volatile movements?
If you are having difficulty answering any of those questions, it is important that you take steps to have a better understanding of the exposure you have to your entire basket of currencies and that you have the accurate, complete and timely data you need to not only mitigate any currency risk but also to answer any questions your CFO and board may have about how these movements have affected your business.
It’s time for you to talk to FiREapps.
Want to learn more?
See the FiREapps Currency Crisis Infographic for an overview of recent currency surprises.