By Mark Klein,
International Banking Officer, Fifth Third Bank

February trade figures are reporting a $61 billion deficit, our largest ever. As the U.S. dollar (USD) continues onward in a weakened state, and the global economy shows signs of awakening, U.S. export opportunities should increase, giving us a unique opportunity to decrease this deficit.

At first, a U.S. company may object to receiving payment for their exports in a foreign currency. My answer is to consider it…HEAVILY.

In the following examples, I will demonstrate the advantages of receiving payments in foreign currencies in both a weak USD and strong USD environment. Consider allowing your customer to pay in their home currency and incorporate this into your pricing strategy.

Lets start with an increasing USD environment: If your customer is paying you in USD, at some point, they must purchase the USD in exchange for their home currency. As the dollar gets stronger, your customer needs an increasing amount of their home currency to obtain the same amount of USD to pay for your goods. This is an obvious competitive disadvantage. Your product has become more expensive to the foreign buyer just because of the foreign exchange market fluctuations.

As an example, the EUR moved from 0.77802 EUR per USD (1.2853 USD/EUR) in January 2004 to 0.8434 EUR per USD (1.1801 USD/EUR) in May 2004. Effectively, that is an 8.5% price increase to your customer over a 4 month time period. For every (1) USD your customer purchased, their cost has increased 6.5 EUR. Therefore, when the USD is gaining strength against the EUR, you are forcing price increases upon your customer, even though you are receiving the same amount of USD.

This increase in currency exchange cost to your customers may prove more than they can absorb and they will turn to “same currency” suppliers. Remember, the number of countries accepting the EUR as a payment means is always increasing. By accepting the EUR as payment, you have in affect leveled the playing field with your European competitors.

Now lets look closely at a weakening USD environment. Again, if your customer is paying you in USD, at some point they must purchase the USD in exchange for their home currency. As the dollar gets weaker, your customer needs a decreasing amount of their home currency to obtain the same amount of USD to pay for your goods. The gain your customer realizes on a weakening dollar is your foregone opportunity. If hedged properly, this can be direct value to your bottom line.

As an example, the EUR moved from 0.8295 EUR per USD (1.2056 USD/EUR) in August 2004 to 0.7341 EUR per USD (1.3623 USD/EUR) in December 2004. This 13.0% currency move could have been value to your bottom line over this 4 month time period. For every (1) USD your customer purchased, their cost has decreased 9.5 EUR. Therefore, when the USD is weakening against the EUR, your customer is realizing an “unplanned” cost savings, which could have been an increase to your margin if you had been managing these EUR receivables.

A willingness to work with foreign currencies offers quantifiable advantages to the export customer. Outlined below are the major advantages:

The Marketing Advantage:

• When competing for business against local competitors, you avoid being considered “inflexible” and make comparisons easier for your customer.
• When competing against other exporters to that country, you will be viewed as “flexible,” as customers generally prefer to work in their home currency.

The Risk Management Advantage:

• By selling in USD, exporters assume their foreign trading partner’s risk and forego the opportunity to manage it to their advantage.
• An exporter that manages currency exposure better than its customer will increase margins or price more competitively.

The Pricing Advantage:

• By pricing its exports in a foreign trade partner’s currency, the US firm is in better position to take advantage of favorable exchange rate movements.
• For exporters, an increasing U.S. dollar puts price pressure on your customers; a drop in the value of the dollar creates an opportunity for additional gain and wider margins when foreign currency proceeds from goods are converted back to dollars. (Note: We are currently in a decreasing $ environment, so you could be taking advantage of foreign exchange gains!!).

Dominant Position Advantage:

• The party managing the foreign exchange exposure has more control than the party paying in its home currency by maximizing the advantage of favorable exchange rate moves and by minimizing the disadvantage of unfavorable moves.
• A proactive stance in managing foreign exchange exposure heightens a firm’s awareness of the value of the dollar and its affect on prices.

Mark Klein is an International Banking Specialist for Fifth Third Bank in Louisville, KY and a board member of the KWTC.

Mark can be reached at 502-562-5331 or mark.klein@53.com.