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The Risks of Currency Value Fluctuation

From political turmoil to a natural disaster, there are plenty of factors that cause a currency's value to rise and fall. When a business engages in international business transactions — such as importing, exporting and paying foreign employees — swings in currency value can have a significant impact on the bottom line.

Market fluctuations can impact everything from purchasing power to operating costs, making it difficult for businesses to predict profits and losses. If exchange rates take an unfavorable turn, an international business may end up paying more or receiving less from its partners and overseas customers.

Here are three approaches that can help business owners plan for swings in currency value.

The yen continued to soar, and as it did, it became harder for Japanese exporters to compete with the prices offered by exporters in other countries.

1. Acknowledge that Unpredictability Is Predictable

It’s crucial that business owners take steps to understand where a country’s currency stands. But it’s just as important to acknowledge that foreign currency values can change on a dime. Take, for example, the 2011 natural disasters that impacted Japan.

Immediately after the 8.9-magnitude earthquake and 13-foot tsunami hit Japan’s Eastern coast on March 11, 2011, the Japanese yen began to slide. But within a few days, the currency value strengthened as Japanese business owners and citizens created a high demand for the currency by purchasing medical supplies and other essential items.[1]

The Japanese government began pumping money into the economy to guard against an overly strong yen. Yet the yen continued to soar, and as it did, it became harder for Japanese exporters to compete with the prices offered by exporters in other countries. Adding to the problem, when customers made international payments in their native currencies, Japanese exporters ended up with less money after currency conversion.[1]

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2. Consider Currency Risk at the Outset

“A lot of business owners think of an exotic spot to do business, and they just move there and start a business,” says Dmitry Dragilev, a Boston native and designer of the Currency Exchange Fee Calculator app.

Dragilev says it’s important for business owners to consider the economic climate and fluctuations in the exchange market before setting up shop in another country. While many economic and political turns can’t be predicted, understanding the variables can help business owners steer clear of markets on the verge of instability.

3. Minimize Risk

There are a few things small business owners can do to help minimize fluctuation risks in the market. For example, business owners can employ strategies such as crafting contract terms that ensure payment will be submitted in their domestic currency. And when businesses make international payments, they may consider locking in a fixed rate on their currency exchanges by using forward contracts.

[1] “The Strong Yen is a Two Edged Sword for Japan,” Aug. 18, 2011, The New York Times

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