The Future of Exchange Rates for Importers/Exporters
The broad based theme of the currency markets in the second half of 2003 was US dollar weakness. From July onwards, most of the major currencies of the world strengthened steadily against the dollar until the end of the year. There was a wide range of reasons, including the record US trade deficit, a large budget deficit, and interest rates that held at 40 year lows.
For an importer/exporter, the relative strength of currencies is not a trivial issue. Small fluctuations between currencies can erase profit margins or make them enormous. Determining the trends in the currency market over the second half of 2004 is therefore an important issue.
The biggest question many savvy importers/exporters are asking themselves is where the US dollar is headed: will it rebound from its fall against the euro, when it recently reached a low of 1 euro purchasing over $1.29 US dollars? Or will the slide continue? Some of the fundamental reasons behind the dollar's weakness—the twin budget and trade deficits—remain as large as ever. These would both predict a continued weakening of the dollar. However, the US economy is on a much stronger footing than it was 12 months ago. Industrial production has expanded in the past six months, GDP has shown strong results for several straight quarters, and even the non-farm payrolls numbers that had lagged behind have shown strong results for the first time in the recovery. All of this improved data points to a tightening of US interest rates in order to keep ahead of inflationary pressures.
Follow the Interest Rates
If the US Federal Reserve does decide to tighten its policy and raise interest rates, the dollar may continue to strengthen as this shift in interest rates occurs. Funds that were placed in high-yielding fixed income currencies like the Australian dollar may be moved back into the US dollar, as the US dollar will yield more to those who have it in savings. In Europe, the English pound is in the midst of an expansionary cycle, and hence may raise interest rates to ensure growth at a reasonable rate. In this case, the pound could also experience a rise in value. This bodes well for importers residing in the US and Britain, as it increases their international purchasing powers. On the flip side, exporters located around the world may wish to target US and British companies, as their increased purchasing power certainly makes them a more lucrative client. For those dealing in the Japanese market the GDP report for the fourth quarter indicates that the Japanese economy grew by its fastest pace in over 13 years. After 10 years of stagnation, last year's rebound in Japan's economy is expecting to boost Japanese exports. In light of this economic scenario, firms participating in a global economy need to consider the impact of exchange rate movement on their bottom line – and need to construct strategies and business partnerships that reflect this.
Index* |
1m |
3m |
12m |
Euro/dollar |
1.24 |
1.27 |
1.27 |
Dollar/yen |
110 |
106 |
102 |
Euro/yen |
136 |
135 |
129 |
Sterling/dollar |
1.83 |
1.88 |
1.84 |
Dollar/swiss |
1.27 |
1.24 |
1.23 |
Dollar/canada** |
1.31 |
1.29 |
1.27 |
Australian/dollar** |
0.76 |
0.78 |
0.77 |
New Zealand/dollar** |
0.66 |
0.68 |
0.66 |
Currency forecasts of major global indexes are shown below.
* Index is compilation of the forecasts of 33 leading investment banks as of 3/15/04
** Index is compilation of the forecasts of 13 leading investment banks as of 3/25/04
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