There’s a lot of talk about the fate of the US dollar today. And for good reason: there are, in theory, rationales as to why the value of the dollar could fall sharply, perhaps in the not-too-distant future.
Even if you’re not an economist, or don’t live in the United States, chances are the fate of the dollar will impact you in some way. After all, the dollar is the world’s ‘reserve currency‘. More directly, many online businesses have customers in the US who pay for goods and services and dollars, and many others also have suppliers who charge for goods and services in dollars. After having an interesting discussion with a friend about this subject this weekend, I thought the fate of the dollar was worth discussing here.
In you run a business, a steep drop in the dollar would have the following impact:
- If a significant amount of your revenue comes in the form of dollars, a declining dollar effectively means less revenue if/when you exchange your dollars for local currency.
- If you business with American suppliers who charge in dollars, a declining dollar effectively means you are paying less, assuming that you are exchanging your local currency for those dollars.
Many large companies that transact business globally in multiple currencies have programs in place to manage foreign exchange risk. Google, for instance, benefited to the tune of $39m in the third quarter of 2009 because it managed its foreign exchange exposure well. But for the average small business with foreign exchange exposure, currency fluctuations are a fact of life and little is done to combat their possible ill effects or to realize their potential benefits.
Given the unprecedented nature of the global economy, however, that may not be so wise anymore given the serious risks that many believe are only increasing. If those who warn of a ‘dollar collapse‘ are even close to being right, it may make sense for your business to (at the very least) start paying attention to the subject. A few things to look out for:
- If you’re based in the United States and do most of your business in the United States, selling abroad may not be such a bad thing to consider (or plan for). If your expenses are dollar-based, you may be able to compete overseas very well on price, especially in countries where the local currency has appreciated significantly against the dollar.
- If you’re not based in the United States but have a significant number of American customers, it may be time to diversify, especially if your expenses aren’t dollar-based. Conversely, you may be able to reduce your expenses by locating American suppliers whose products and services are cheaper when you factor in foreign exchange.
Obviously, there’s a lot to consider here, much of it beyond the scope of this discussion. I’m certainly not suggesting that everyone rush into ‘dumping the dollar‘. The death of the dollar is far from guaranteed, although many serious folks worth listening to are concerned. It also needs to be pointed out that currencies other than the dollar are not immune to the risk of significant depreciation. As anyone who has held pounds for more than a year knows all too well.
If there’s one key takeaway, it’s this: in a global economy, currency matters. If you’re doing business online, chances are that you have customers and suppliers in other countries. Currency fluctuations can have significant impacts on these relationships so paying attention to foreign exchange issues as it relates to your income and expenses is a wise thing to do.
Photo credit: Photos8.com via Flickr.