Covering the Spread: Does the Buck Stop Here?

In the wake of Inauguration Day, the US dollar retreated from earlier highs on Donald Trump’s recent call for a more competitive greenback. As the world’s sole reserve currency, when the dollar goes, so does the rest of the world. In our new series, we look at how post-election forex challenges could affect dollar-based corporate payments and transfers in the months ahead.

Does the buck really stop here? Surprisingly, it may, if Trump has anything to say about it. In the weeks after the US election, the dollar soared to a 14-year high — up against almost every other world currency on optimism that America’s currency would flourish under more protective trade policies. Last week, however, the incoming president said the dollar was too strong for US companies to be competitive with key trade partners such as China. This led to an immediate pullback, with the dollar dipping 0.3% against its peers as markets absorbed the possibility that a Trump presidency might not be, in the end, a walk in the park for the venerable greenback.  

Although the dollar is still hovering near record highs, there is a debate among economists and currency experts over whether the buck could (and should) remain in its lofty position. On one hand, the protectionist trade policies that lead to a strong dollar benefit the American economy as a whole. But on the other side of the coin, protectionism could also inflate the dollar down the line, which is something US officials are keen to avoid. More direct manipulation via monetary and market interventions could have their own repercussions. In the end, authorities are likely to strike a balance between the two, weighing the exchange rate risks against the need for broad-based economic protections like tariffs, and tax incentives/penalties for companies based on where they do business.

In any case, uncertainty around the dollar means that it is likely to remain volatile in the months ahead. In the face of ever-changing spreads, multinationals engaged in frequent dollar-delineated payments can have a hard time keeping up. This is especially true for small and mid-size companies without access to sophisticated forecasting tools. A routine payable (for, say a recurring shipment of Chinese steel) can fluctuate from day to day based on how the dollar is trading against the yuan.

So what are some things that C-level execs like CFOs, as well as treasurers and financial controllers can do to minimize value erosion for recurring payments involving the US dollar? In the coming weeks we will look at some of the more problematic dollar pairings for companies that make payments in multiple currencies. We will also examine some strategies for managing 1) Exposure Risk and 2) Execution Risk around these payments and transfers.

A new president is unlikely to mean the end of dollar volatility, but with careful planning, companies can be sure that their FX risk is kept to a minimum for all payables, no matter how perfunctory the transaction may be.