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What a Strong Dollar Means for Your International Sales – How to Prepare

cash-register-1885558_1280The U.S. dollar is stronger than it’s been in years. Since 2014, it’s been on a tear — not quite in uncharted territory, but certainly at levels not seen for years prior. According to Macro Trends, you have to go back to 2002 to find the dollar as consistently strong as it has been since 2014, and back to the 1980s to find a period during which the dollar’s strength eclipsed the current situation.

What does a strong dollar mean for regular Americans? A lot, actually. If you own a company that does business internationally, you stand to gain — or lose — a lot from the dollar’s near- and medium-term gyrations. That’s doubly true if you export or import physical goods, as millions of American companies do.

With that in mind, here’s what a strong dollar means for your international sales.

Lower Prices for Conventional Energy Mean Greater Buying Power Everywhere

Since the dollar is the de facto currency for oil trades, its strength is directly correlated with the price of oil. When the dollar is strong, the price of oil tends to fall and stay low. When the dollar is weak, oil prices rise and stay high. Back in 2007 and early 2008, when the dollar was very weak, oil was dear. Today, in a strong-dollar environment, oil is cheaper than it’s been on a consistent basis since the early 2000s.

That’s great news for global consumers, especially in countries where oil is heavily taxed: the European Union, Australia, Japan, Canada. When consumers have to spend less to fill up their tanks and heat their homes, they have more to spend on everything else.

…But Dollar-Denominated Products Cost More Overseas

But there’s a downside: when the dollar is strong, U.S.-made products cost more overseas. For instance, say you spend $10 to make your signature product. You sell it to a U.S.-based exporter for $20, who then sells it to a German distributor for $30. The distributor then sells it to local merchants for $40 — but charges them in euros, the European single-market currency. When each dollar is worth 0.5 euros, the product costs 20 euros. But, when each dollar is worth 1 euro, as is very nearly the case today, the product costs 40 euros — twice as much. It’s not hard to see how this can affect buying decisions.

Chances to Re-examine Longstanding Partnerships

Misunderstandings between international partners can certainly affect the business, even those favorably remedied. However, even smooth relationships need to be re-evaluated from time to time. For instance, if your longstanding local vendor partners seek costly concessions to offset their dollar-denominated losses, look for new partners that want your business badly enough to accept lower margins.

Local Payrolls May Be Easier to Make

If your workforce is international and you generally pay in local currency, you’ll benefit from the inverse of the “dollar-denominated product problem”: each of your dollars buys more units of the local currency, so you need to spend fewer dollars to pay your local workforce. That reduces your international payroll costs and frees up capital that you can then reinvest into your company.

Past Performance Does Not Predict Future Results

Even when it comes from the experts, it’s best to take financial advice with a healthy dose of salt, because past performance does not predict future results. Just because the same set of conditions has produced the same outcomes before, doesn’t mean it’s necessarily going to happen again.

It’s true that a strong dollar usually produces certain outcomes. But history rarely repeats itself — more often, it rhymes. And, as the world economy grows ever more interconnected and interdependent, it’s entirely possible that the old rules no longer apply. Then again, there’s absolutely no harm in being prepared, even if what you’re preparing for doesn’t come to pass precisely as you envisioned.

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James

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