Thursday, September 04, 2008

Dollar Rises, Hurts Some U.S. Companies


The U.S. dollar has risen by 5.4 percent in the last month against a basket of major international currencies, the greatest one-month rise in 11 years. The dollar's strengthening against other global currencies has occurred because of increased fears over the weaknesses of other economies, such as those countries in the European Union.

However, the rising value of the dollar has been a negative development for those U.S. companies with significant exports or operations overseas. A stronger dollar means that these companies' products will be more expensive and less competitive in foreign markets. In addition, a stronger dollar reduces profits when foreign earnings are changed into U.S. dollars.  

The dollar's rise against international currencies affects those companies that did not hedge on the dollar's exchange rate. Hedging involves using the forwards market to lock in an exchange rate for a certain period of time in the future. Although companies that hedge their exchange rates remove the risk of unfavorable currency swings, they also lose the ability to take advantage of unexpected beneficial changes in the exchange rate.

Despite the dollar's recent gains, it still has only recovered 2.4 percent of the 8.4 percent in value it lost in 2007. The dollar's recent gains follow fears that other countries have lagged behind the U.S. and will now be increasingly affected by the global credit crisis, sparked by the U.S. sub-prime mortgage breakdown that began in 2007. 

1. Which types of companies in the U.S. benefit from a stronger dollar, and which types of companies benefit from a weaker dollar?
2. What other type of futures or forwards markets exist for products or services? 

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