For those working in currency markets over the last 20 years, it’s a startling sight to log-in to their Bloomberg portal and see total parity between the dollar and the euro. Indeed, the euro has recently fallen below the dollar for the first time in two decades, and further movement is predicted.
This shift has been a rapid one over the last year, with dollar gaining approximately 12% of value against the euro in a single year, and a lot of those percentage points have been in the last few months.
We wanted to explore how this shift affects cross-border payments and money transfers, so we sat down with Ann-Marie Carrigan, Strategic Account Manager at TransferMate, to explore who benefits, and who doesn’t.
Q. For those that want to get to the heart of the matter straight away – how does the strong dollar affect cross-border payments on money transfers?
Well, like all currency fluctuations, it’s a double-edged sword.
We all know the basics – a strong dollar will make goods more expensive for non-US companies to buy from the country, and on the flip side it gives US companies more buying power when it comes to importing goods.
When we look at money transfers and cross-border payments, it’s firstly important to note that everything can continue to change one way or the other – the dollar may continue to strengthen, or it may go the other way. Looking at the evidence and expert analysis in the market, it is expected to strengthen even further against the euro by a few percentage points.
So, the decision-makers at these companies need to make a call – do we buy from the EU now (and that can be new goods, current invoices or investments) or wait for another few percentage points to fall?
Q. It’s a gamble?
Yes, to a certain extent, but there are ways to load the dice in your favor, so to speak. I would also point out that it’s important to note what the US Federal Reserve will do to combat inflation, and what knock-on effect that will have on the dollar.
It’s very likely that the US Federal Reserve will hike interest rates by something like .75% in the near future to try and put a dampener on the inflation they’re seeing. This will, in turn, make the US dollar stronger. This is because higher interest rates will most likely attract foreign investment to the US, increasing the demand for and value of the dollar.
So, when we talk about a gamble, it’s likely that the end result will be the dollar getting stronger – the experts are saying by about 3%.
Q. So, the dollar is likely to strengthen further, what’s the advice for those decision-makers you talked about? Let’s talk about those US businesses first.
Well, now is a good time to settle invoices, make investments and buy goods outside of the US, no question. Compared to this time last year, you’d be saving something like 12% on what you would have paid in July 2021.
As I’ve said, the experts are predicting another 3% movement or so in the dollar strengthening against the euro, and that is still a significant amount, but the rates haven’t been this good for 20 years, so that fact has to be accounted for.
Q. How can non-US businesses protect themselves against this currency movement?
I would be suggesting is that if you’re reliant on the US market, now is the time to be looking at contracts to protect yourself.
Buy in on a variable flexible spot contract. Protect yourself for six months. So, if you can buy in parity now, why not buy in part some of it? So, you say you need 500k for six months, why not book in 300k to protect yourself?
I would be suggesting to my clients, look at contracts, open up a dollar account and buy dollars. Leave it sitting there. Use the Global Accounts product from TransferMate – this will help you be agile and quick off the mark when you need to be.
Q. Should non-US businesses be buying dollars?
Buy your dollars if you have surplus funds. Protect yourself. So, either A), you buy your dollars in and you use them while the rates are good or, B) if you find you don’t need the dollars, you can sell them back.
So, if you use it and the rate stays roughly where we are, then you’re fine. You protected your exposure to purchasing for three, six months, a year, whatever your choice may be.
Q. To take a step back, why is this happening? Where is the pressure coming from?
Economists love to say ‘there are lots of factors’ and, annoyingly, they’re usually right, but we can really narrow this down to a few key things.
Inflation would be the top of the list, no question, that’s the big driver in the world economy right now. What caused the inflation? Brexit is the first thing that comes to my mind, and then the supply chain crisis followed by the war in Ukraine.
This confluence of circumstances has driven up demand and dampened supply; pretty much the equation for inflation.
Q. To summarise, what would you be advising TransferMate clients right now?
I would say now is the time to buy dollars. If your clients say ‘I don’t want to do that for a couple of months’ I’d bring in the option of a contract to protect themselves.
The evidence suggests the dollar will become more expensive, so now is the time to buy.
For US-based businesses and investors, now is a great time to be investing in the Eurozone because you’re getting more value. You could get even more value in the medium-future, but sometimes you have to acknowledge that you’ll rarely get the best rate of all time, so why not take advantage of great rates while you have them?
The same goes for paying for goods and existing invoices in the Eurozone. Whether it’s buying assets, investing, equity, no matter what it is, rates are favourable and now is the time to do it.
Ann-Marie, thanks so much.
If you want to talk to us about the best way to take advantage of the strong dollar, or protect yourself against it, get in touch with the team today.